Investment logic:

Driven by research and development, create an integrated “API+formulation” strategy. The company was founded in April 2010 and listed on the Shanghai Stock Exchange in 2017. Based on R&D, production and sales of specialty APIs and pharmaceutical intermediates, the company's business gradually expanded to the CDMO, pharmaceutical and innovative drug sectors.

The basic market for specialty APIs is stable, and the construction of production capacity has unleashed growth momentum. 1) R&D builds competitive advantage: Taking entecavir as an example, the company's production process was simplified from 13 steps to 5 steps compared to the original research, and the cost advantage brought by technology in the context of collection was further highlighted. 2) The product structure continues to be enriched: Since its establishment in 2010, the company's API business has formed nine major product categories, and new projects have continued to advance. In 2022, the company's 6 API projects passed 9 approvals in China, Japan, Europe, etc. 3) The construction of the company's API production capacity is progressing in an orderly manner: all 7 workshops of the “Featured APIs and Key Pharmaceutical Intermediates Production Base Construction Project (Phase I)” of the 20-year fund-raising project have completed plant construction. Production is expected to be put into operation one after another in '23. It is expected to contribute 647 million yuan in revenue after full delivery. In January '23, the company completed the private offering of the “High-end Pharmaceutical Internationalization Project and the Industrialization Project for Special APIs and Key Pharmaceutical Intermediates (Phase II)”. The net capital raised was 474 million yuan and the price was 22.29 yuan.

Relying on rich R&D experience and a good international cGMP system, the CRO/CDMO/CMO business has become the main growth engine in recent years. From 2019 to 2022, the CRO/CDMO/CMO business grew from 82 million yuan to 405 million yuan, and the CAGR reached 49.2%. As of 2022, there are 33 ongoing CRO/CDMO/CMO business projects, including 14 API projects and 19 advanced intermediate projects. At present, the company has become a strategic supplier to many major international pharmaceutical companies such as Novartis, LONZA, Eljian, etc., and has been recognized by a number of customers in the European and American markets.

Build a new growth pole for the pharmaceutical business around domestic and international co-development models. The company has carried out long-term comprehensive cooperation with STADA, a leading global pharmaceutical company, on joint development and global marketing of chemical generic drug formulation products, thus opening up a codevelopment cooperation model between the company and European generic drug companies. At the same time, the company relies on the API business to build an integrated model of “intermediates+specialty APIs +formulation+domestic and foreign”, and reports simultaneously in domestic and foreign markets. In terms of innovative drugs, there is a forward-looking layout. The new drug class 1.1 brozopent challenges the 10 billion ischemic stroke market. Currently, phase II clinical trials have been completed, and phase III clinical trials have yet to be entered; at the same time, they are investing in new drug companies and collaborating to expand the CXO business.

Profit forecasts, valuations, and ratings

We forecast that the net profit of 2023-2025E is 3.13/4.12/555 million yuan, compared to +32.9%/+31.74%/+34.68%, corresponding to EPS 0.74/0.97/1.31, respectively. Referring to comparable companies Borui Pharmaceutical, Nortel Biotech, Jiuzhou Pharmaceutical, and Minovar, we gave the company 1.26 times its 23-year PEG, corresponding target price of 28.55 yuan, covering the “buy” rating for the first time.

Risk warning

Product development and technological innovation risks, policy supervision risks, environmental risks, production safety risks, exchange rate fluctuation risks, and the risk of restricted shares being unbanned.