Key points of investment

We look forward to the gradual recovery of the CGT industry and the flexibility of the company's performance after the launch of production capacity in Hong Kong.

Performance: Due to short-term effects of the pandemic and demand changes, performance fluctuated. The company disclosed its 2022 annual report and 2023Q1 results: 2022 revenue of 291 million (YOY 14.26%), net profit of 39 million (YOY -28.07%), after deducting non-net profit of 103 million (YOY -24.87%), net cash flow from operating activities was 21 million, a year-on-year decrease of 80.40%.

2023Q1 achieved revenue of $031 million (YOY -57.89%), net profit of -32 million (YOY -363%), net non-net profit of -33 million (YOY -403.08%), and net cash flow from operating activities -33 million, mainly due to poor investment and financing environment, which led to extended customer repayment times. At the same time, R&D investment continued to increase, increasing the number of personnel reserves for the commissioning of Lingang production capacity (71.9% year-on-year increase in personnel at the end of 2022).

The sharp decline in 2023Q1 revenue was mainly due to delays in order delays or delays due to delays in financing from CDMO business customers. The sharp decline on the profit side was mainly due to a decline in operating income, while operating costs and expenses for various periods increased to varying degrees. In addition, the company's profitability declined significantly in 2023Q1, with a gross profit margin of -21.46% and a net profit margin of -103.30%, mainly due to varying increases in operating costs and expenses during various periods.

Business: Continuing to help customers complete multiple IND filings, hoping to establish a sustainable business split for medium- to long-term orders: the gene therapy CRO business earned 66 million dollars in 2022 (YOY 19.36%). The gene therapy CDMO business achieved revenue of 217 million (YOY 12.46%). Affected by the economic downturn in 2022 at home and abroad, the development of the 2022 Q4 business was clearly blocked, leading to delays in delivery of some CDMO projects or delays in orders, and a slowdown in short-term business growth.

From the perspective of business progress, we helped customers obtain 12 clinical trial approvals from China and the US throughout 2022, involving various oncolytic virus products, AAV gene therapy products, lentivirus products, cell therapy products, plasmid and mRNA products. By the end of the 2022 annual report reporting period, the company had helped different customers obtain 18 clinical trial approvals in China, the US and other places, involving more than 150 CDMO projects. The comprehensiveness of the projects and the number of successful experiences were ahead of the industry. 2023Q1 supports CDMO customers to obtain 6 new IND approvals, add 16 new CDMO customers, and add more than 50 million yuan in orders. The above is also expected to support the sustainability of orders placed after the company's production capacity in Lingang is put into operation, and the capacity utilization rate continues to rise after entering the clinical phase.

People & Technology & Productivity: Reserve Accelerated, Expectations Expected

Personnel are prepared in advance to support the investment of production capacity in the port. By the end of 2022, the number of employees in the company was 631, an increase of 264 over the end of 2021 (YOY 71.9%), mainly to reserve talents in advance for the Lingang production capacity to be put into operation in 2023.

Technology investment: Maintain high intensity and continue to reserve new technologies. In 2022, the company invested 35 million yuan in research and development (YOY 47.47%) and 2023Q1 spent 11 million yuan on R&D (YOY 58.80%). In terms of research and development of new technologies and processes, the company further increased its investment. In the future, the company will continue to follow up on global cutting-edge technology and processes, continue to increase investment in core technology fields, and continue to drive service capabilities by improving technical strength. This also lays technical support for continuing to receive more orders in the future.

The new production capacity is ready, and it is expected that 2023H2 will officially start production. According to the company's annual report, “The company is building a 77,000-square-meter precision medicine industry base in Lingang, Shanghai, and put into operation in two phases; according to changes in market demand, the first phase of construction process equipment line was adjusted. On the basis of the original plan to build 11 virus production lines, a cell production line of about 5,000 square meters was added, which is expected to be put into trial operation in the first half of 2023,” 2023Q1 revealed that “on April 21, 2023, Heyuan Zhizao Precision Medicine Industry Base” opened in the Lingang New Area of Shanghai and is scheduled to be officially put into operation in the second half of the year.”

Profit forecasting and valuation

Considering that the impact of the 2022 and 2023Q1 pandemic and the investment and financing environment on the company's profits and revenue exceeded our previous expectations, and that large-scale production capacity investment in Lingang may have a certain impact on the profit side in the short term, we have lowered our revenue and profit for 2023-2025. We expect the company's EPS for 2023-2025 to be 0.09, 0.14, and 0.28 yuan/share (the previous forecast for 2023-2025 EPS was 0.21, 0.42, and - yuan/share, respectively), and the closing price of 2023/4/28 corresponds to the 2023 PE 192 times (corresponding to 2024 PE 124 times).

Risk warning

Risk of worsening investment and financing of innovative drugs, risk of capacity utilization falling short of expectations, risk of competition risk, risk of service project failure, and regulatory and policy risks.