We think of the company as an innovative pharmaceutical company with highly differentiated underrated pipelines. Referring to the company's proven ability to commercialize innovative pharmaceutical products in the fields of neurology, oncology, and self-immunity, we think we can quickly make a leap from Biotech to Biopharma. According to our estimates for 2022-2026, after deducting COVID-19 drugs, the innovative drug sector's sales revenue CAGR is expected to reach 23.77%. It is a high-growth company in the scarce innovative drug business. Looking at the current price, the 52%-71% space was covered and given a “buy” rating for the first time.

Differentiation: Deeply involved in nerves, tumors, and immunity, strong pipeline characteristics 1) Tumors: Differentiated applications/dosage forms, outstanding competitiveness. ① Endo: Lay out the complications of thoracic and abdominal effusion tumors. Treatment methods are limited, and there is plenty of room for growth; ② Envida: The advantages of differentiated administration are outstanding, the curative effect is excellent, and continuous implementation can be expected; ③ Cosella: unique bone marrow protection & anti-tumor mechanism, data & pattern are superior, and they are optimistic about the release potential.

2) Neurology: Differentiated dosage forms to strengthen the leading edge in stroke. New injection+sublingual tablets first: Achieve treatment for the full course of stroke. Demand is largely unmet, and large single products can be expected;

3) Self-control: Elamod leads innovation and actively expands pipelines. ① Elamod: The first small molecule drug to treat active RA. Sales continue to rise. Primary sickness syndrome is expected to contribute to performance elasticity; ② abatacipp:

The first and only ctLA4-FC fusion protein approved for sale in mainland China.

High growth: Expectations of collection have bottomed out, and delivery of innovative drugs is expected to accelerate

Generic drugs: The impact of harvesting has gradually bottomed out. The core generic drug products pemetrexed disodium, amoxicillin, and rosevastatin calcium in 2020-2021 were negatively affected by collection (no bid), edaravone injections were removed from medical insurance, and sales of edaravone injections declined sharply, compounded by the pandemic, which led to a decline in in-hospital sales. We expect the above impact to gradually bottom out after 2023, and the company's generic drug sector is expected to maintain steady development.

Innovative drugs: Commercialization capabilities have been proven, and implementation is expected to accelerate. Based on full verification of the ability to commercialize innovative pharmaceutical products in the fields of neurology (new first), oncology (Endo, Envoli), and self-reliance (iramod), the company is still expected to achieve a breakthrough in innovative drug sales after 2023. According to our estimates, after deducting COVID-19 drugs, the innovative drug sector's sales revenue CAGR is expected to reach 23.77% in 2022-2026, which is a high-growth company in the scarce innovative drug business.

Underestimated: The ability to commercialize innovative drugs has been verified, and we are optimistic about room for valuation improvement under the support of differentiation & high growth. We think the company's undervaluation may be due to the following two points: 1) Generic drugs dragged down performance: Looking back at the company's revenue performance in 2019-2021, it can be clearly seen that the company's performance fluctuated greatly due to generic drug collection and the impact of the core product idaravone injection being removed from health insurance, which may lead to relatively low valuations. Looking ahead to 2023-2025, the impact of the collection and removal of edaravone injections from health insurance will basically bottom out. The share of innovative drugs is expected to rise further to 70%-80%, and the drag effect of generic drugs has basically bottomed out. With the rapid release of innovative drugs, the company's performance is expected to return to high growth, and valuations are expected to increase. 2) The market believes that the ability to commercialize innovative drugs has not been verified:

The market may be worried that the path of differentiated management and commercialization after the online market will not be clear, which will drag down valuations. However, we believe that Endo and Elamod's innovation and commercialization capabilities in 2019-2022 have been fully verified, and that the ability to commercialize and innovate in 2020 to 2022 has also been fully verified. The impressive performance of envolizumab after marketing also fully demonstrated the company's strong ability to commercialize new innovative anti-tumor drugs. The above innovative drug types in the fields of anti-tumor, neurology, and self-immunity have been commercialized, which is expected to strengthen the high degree of certainty in commercialization of newly marketed drugs (first new sublingual tablets, new indications of Endo, new indications of elamod, cosella, cervazumab, etc.).

Looking ahead to 2023: Whether referring to imitation leaders (Hengrui Pharmaceutical, etc.), innovative Biotech (Betta Pharmaceutical), or BD biotech leaders (Zaiding Pharmaceutical, etc.), the company's PS is underestimated. We believe that based on the above analysis of differentiation, high growth, and proven ability to commercialize innovative drugs, the company's valuation has a lot of room for improvement. According to our estimates, based on the closing market capitalization of April 13, 2023, the corresponding PS in 2023 was 3 times. Comparable companies such as Betta Pharmaceutical, Cinda Biotech, Zaiding Pharmaceutical, and Hengrui Pharmaceutical all had an average valuation of 12 times, and there is plenty of room for valuation improvement.

Profit forecasting and valuation

1) Absolute valuation: The current value of innovative drug+generic drug core product DCF is 36.447 billion yuan. According to the DCF valuation model, we calculate that the reasonable valuation of core products such as Endo and Xianbixin is estimated to be 34.437 billion yuan, and the generic drug sector corresponds to the current DCF value of 2,009 billion yuan. After sensitivity testing, we believe that the company's reasonable market value range is 345—38.7 billion yuan. 2) Relative valuation: Corresponding market value of 32.7-40.9 billion yuan. Referring to the company's PS valuation, we think the company's BD+ self-developed product pipeline will soon enter a rapid release period. We will give 4-5 times PS in 2023, corresponding to the market value of 32.7-40.9 billion yuan in 2023. 3) Combining relative valuation and absolute valuation, we gave the company a target market value of 345-38.7 billion yuan, corresponding to a market value of 393-44.2 billion Hong Kong dollars after conversion under the exchange rate of 0.8760 (HKD to RMB on April 13, 2023). The corresponding target price was 14.79-16.62 HKD/share, corresponding to a space of 52%-71% of the current price.

We expect the company's EPS in 2023-2025 to be 0.56, 0.77, and 0.85 yuan/share, and the closing price on April 13, 2023 corresponds to the 2023 PE 15 times (corresponding to 2024 PE 11 times), covering and giving a “buy” rating for the first time.

Risk warning

Risk of clinical failure, risk of competition, risk of sales falling short of expectations, policy risk, measurement risk.