The recovery of overseas demand led to the volume and price rise of intermediates and API business in the first half of the year. The company recently announced that net profit of shareholders in the first half of 2023 is expected to increase 90.8% year-on-year to about 1.2 billion yuan (RMB, the same below). Due to the rebound in overseas market demand, the volume and price of intermediates and API products have risen, and the income of animal health products has also increased rapidly. We expect the company's revenue in the first half of the year to increase by nearly 30% compared with the same period last year. Due to factors such as higher ex-factory prices of intermediates and APIs, product profit margins will rise, so profit growth will be faster than revenue growth.
Raise the forecast of business income of intermediates and APIs
The main products of the company's intermediates and API business include 6-APA, penicillin G potassium industrial salt and cephalosporin. The market price of these products has remained high since 2022, and the average sales price of the company has risen accordingly. Considering that global demand is gradually recovering after the epidemic, we do not expect a significant decline in market prices in the short term, so we raise our revenue forecast for intermediates and API business, which is expected to be 9.5 per cent CAGR for 2022-25e.
The income of diabetes drugs will gradually meet the inflection point
The implementation of insulin collection in China since July 2022 has led to an average price reduction of 48% for selected products. The company's insulin business revenue is expected to decline in the first half of 2023 compared with the same period last year, but management said sales increased significantly in the first half of the year. We expect the impact of insulin collection price reduction to be fully reflected in 2023, and the business revenue growth will return to growth after 2024, with insulin business revenue expected to be 7.2% in 2022-25e CAGR. In addition, the company expects that the first GLP-1 drug Lilarutide injection is expected to be approved for market around 2024. Lilalopeptide is effective in reducing blood sugar and weight. The sales CAGR of the original research drug Victoza in China in 2018-22 was 13.2%. At present, only East China Medicine (000963 CH) has just been approved in 2023, so if the company's products can be successfully developed, the first-mover advantage is obvious, and is expected to become an important product in the field of diabetes.
Maintain the "buy" rating and raise the target price to HK $8.92
We raised the company's 2023-25e revenue forecast by 2.4%, 5.4% and 5.1% respectively, and the shareholder net profit forecast by 36.1%, 37.6% and 46.4%, respectively. We have scrolled the target price-to-earnings ratio to 2024E PER and raised the target price from HK $6.65 to HK $8.92, reiterating the "buy" rating in response to 31.1 per cent upside.
Risk hints: 1) fluctuations in API prices may lead to lower-than-expected sales; 2) market competition for insulin products may intensify; 3) the progress of new drug research and development may be slower than expected.