Incidents:

On August 28, 2017, the company released an interim performance report: in 2017, H1 Company achieved operating income of 54,534,700 yuan, an increase of 134.81% over the previous year; it achieved net profit of 459,300 yuan, an increase of 127.37% over the previous year.

Comment:

Beyond the influence of self-inspection and verification of clinical trial data, H1 performance in 2017 increased 127.37% year-on-year:

In 2017, H1 achieved revenue of 54,534,700 yuan, an increase of 134.81% over the previous year; it achieved net profit of 459,300 yuan, an increase of 127.37% over the previous year. Compared with the same period last year, it successfully turned a loss into a profit. The main increase in performance was that new contract orders began to gradually contribute to performance. Among them, preclinical research services achieved revenue of 9.6996 million yuan, with a gross margin of about 60.38%. Preclinical research services were the main source of contributing performance; the clinical research service business achieved revenue of 33.6667 million yuan, with a gross margin of about 23.07%. Low gross margin was mainly affected by old orders. It is expected that old orders will be gradually cleared up this year, and gross margin is expected to return to a normal level of 40% next year.

Benefiting from innovative drug development and consistency evaluation, new projects were successfully carried out, and the contract amount increased 236% year-on-year:

In terms of project acceptance, on the one hand, the company actively formed a team to accept orders for consistency evaluation, and on the other hand, benefited from the country's encouragement of the development of innovative drugs and actively undertook innovative drug order projects. At present, the company is progressing smoothly in undertaking new projects. In 2017, H1's new contract amount was about 225 million yuan, an increase of 236% over the previous year. It is expected that it will accept about 500 million new contracts throughout the year, and the order reserve is abundant.

New orders are expected to focus on revenue confirmation in 2018, and the company's performance is expected to bottom out in the future:

In terms of consistency evaluation, it is estimated that the pharmaceutical trial is 8-12 months and the BE trial is 8-10 months. Among the consistency evaluation orders signed this year, most of the pharmaceutical trial revenue and some BE trial revenue are expected to be confirmed centrally in 2018; in terms of innovative drug orders, with the gradual completion of the clean-up of old orders in 2017, the clinical gross margin of innovative drugs returned to a normal level in 2018 and gradually contributed to revenue. Consistency evaluations and innovative drug R&D order revenue are expected to be confirmed centrally in 2018, driving the company's performance to bottom out.

Profit Forecast and Valuation:

According to our estimates, the company's EPS in 17-19 was 0.25, 0.67, and 1.18 yuan respectively, corresponding to 91, 34, and 20 times PE, giving it a “highly recommended” rating.

Risk warning: Consistency evaluation project revenue confirmation is lower than expected; innovative drug order project revenue confirmation is lower than expected; industry policy risk; market competition increases risk.