The company's profit side is under pressure due to multiple factors. We believe that the number of early projects of the company continues to increase and commercialize, and that revenue from late-stage CDMO projects is growing rapidly. As new production capacity is put into use, it is expected to lay the foundation for rapid growth in performance. Furthermore, the number of novel molecular blocks continues to increase and maintain industry leadership (including deuterium-substituted drug molecules, PROTAC, ADC, and oligonucleotides); at the same time, combining the various compound libraries and screening that have been constructed Technical capabilities have completed the screening of multiple new targets, and new drug research and development services continue to improve, which is expected to gradually bring about new performance increases. Overall, we gave the company 40 times PE in 2023, corresponding to a target price of 64 yuan, and maintained a “buy” rating.

The revenue side of the company is growing steadily, and the profit side is under pressure due to multiple factors. In 2023H1, the company's revenue was 844 million yuan, up 14.89% year on year; net profit was 114 million yuan, down 25.61% year on year; net profit after deducting non-return net profit of 108 million yuan, decreased by 28.36% year on year. The company's revenue in 2023Q2 was 461 million yuan, up 15.44% year on year, up 20.13% month on month; net profit returned to mother was 56 million yuan, down 31.76% year on year, down 2.81% month on month; net profit of non-return mother net profit was reduced by 22.48% year on year, down 22.48% year on year, up 59.79% month on month.

We believe that the company's profit side growth rate is slower than the revenue side mainly because: 1) The company is still in the capacity building stage, with 2023H1 fixed assets of 1,313 billion yuan, an increase of 37.69% over the previous year, leading to high depreciation and amortization in 2023H1 - the current depreciation amount is 52.2666 million yuan, an increase of 43.12% over the same period last year. 2) The company continues to optimize its talent structure and increase its appeal to high-quality talents. Staff size and salary have increased to a certain extent over the same period last year. Human resources expenses are 299 million yuan, an increase of 70 million yuan over the same period last year , an increase of 30.65%; 3) The company continued to increase R&D investment in core technologies such as novel molecular blocks, new drug discovery technology, new processes and production technology. 2023H1 R&D expenses were 92 million yuan, up 28.75% year on year, and R&D cost rate 10.96%, up 1.18 pcts over the same period last year; 4) Interest expenses included in the company's convertible bonds included in current costs were 23.5874 million yuan, an increase of 15.8366 million yuan over the same period last year.

In terms of profitability, 2023H1's gross profit margin was 43.68%, down 4.06 pcts year on year; net profit margin was 13.49%, down 8.94 pcts year on year - 2023H1's sales expense rate/management expense rate/R&D expense rate/R&D expense rate/financial expense ratio were 3.21%/11.95%/10.96%/0.29%, respectively, compared with the same period last year, +0.53/+0.03/+1.18/+2.99 pcts (cumulative change +4.73 pcts).

Actively lay out the CDMO business, and integrate service capabilities to meet the comprehensive needs of customers. 2023H1's CDMO business revenue was 651 million yuan, up 17.35% year on year (of which, large-scale supply revenue of molecular blocks was 185 million yuan, up 30.28% year on year); gross profit margin was 38.31%, down 4.86 pcts year on year.

In terms of customer pipeline, the company has deepened cooperative relationships with existing customers, and customer stickiness continues to increase. By participating in international key industry conferences such as DCAT, CPHI, and BIO, the company has further expanded cooperation with key customers and established contacts with potential customers. The number of 2023H1 active customers reached 600, revenue from active customers was 788 million yuan, and revenue increased 16.91% year over year. Continuously expand promising high-quality customers, adding 35 new customers in the first half of the year; focusing on high-value customers and penetrating business cooperation with large multinational pharmaceutical companies. Orders from large multinational pharmaceutical companies were 230 million yuan, an increase of 13.11% over the previous year; the number of customers with large orders over 5 million was 43, an increase of 19.44% over the previous year. The number of end customers served by 2023H1 in the drug development and commercialization stage (including domestic and foreign pharmaceutical companies and small and medium-sized innovative pharmaceutical companies only) is 300, with revenue of 619 million yuan, an increase of 12.78% and 14.63%, respectively, over the same period last year. The company's full-service business model from drug discovery, development to commercialization promotes a new business development pattern of molecular blocks, drug discovery services, and CDMO two-way drainage. The number of cross-business cooperation customers of 2023H1 reached 350. 2023H1 has undertaken 35 API projects. Of these, 2 projects have entered clinical phase III, registration verification and commercialization, 2 are raw material-formulation integration projects, and 25 of the API projects it has undertaken come from European and American customers. We believe that the company is actively expanding its CDMO business and international layout. Currently, the impact of biomedical investment and financing on the demand side is at the bottom. The company has continuously improved its technical capabilities and enhanced business certainty. The domestic and foreign exchange environment has improved markedly after the outbreak of the epidemic in 2023. The company actively participated in overseas exhibitions, visited key customers, and had extensive and in-depth exchanges with global partners to promote cooperation. The company's service quality and efficiency have been recognized by local customers. At the same time, the company has strengthened comprehensive fine management, rational use of production capacity, and effective control of production costs for the company It is expected that the driving effect of the CDMO business will gradually be reflected in the future.

The molecular block business is growing steadily, with new chemical entities contributing new volumes. 2023H1's molecular block revenue was 183 million yuan, up 5.36% year on year; gross profit margin was 63.25%, up 1.30 pcts year on year.

In the molecular block business, the company adopts a series-oriented R&D model, and systematically constructs the R&D team's knowledge and ability to synthesize specific structures, forming a series of product synthesis technical advantages. The 63 compound series covers the main fields of small molecule drug development and can respond quickly to customer needs. As of 2023H1, the company has completed the independent synthesis of more than 40,000 building blocks of compounds, and is in a leading position in the industry in fields such as ternary rings, quaternary rings, bridge rings, spiral rings, five-yuan fatty rings, six-membered fatty rings, and aromatic heterocycles. 2023H1 has designed more than 7,000 new molecular blocks, covering the needs of popular targets such as KRAS, BCL-2, BRAF, BTK, CFB, GLP-1, PI3K, and TKY2; completed the synthesis of more than 4,000 new molecular blocks and continued to help new drug research and development; using new enzymatic chemistry technology, it designed and synthesized a series of unnatural amino acids unique to the market to meet the current demand for peptide drug development represented by GLP-1. Over the years of accumulation, more than 200,000 compounds have now been designed. We expect that in the future, as the company continues to develop novel blocks and track global R&D hot spots, increase product categories at the molecular block end to improve operational efficiency, rapidly develop and supply novel molecular blocks related to new chemical entities such as deuterium-substituted drug molecules, PROTAC, ADC, and oligonucleotides, and respond to customer needs in a timely manner. The company's rapid growth over the next 2-3 years is highly certain.

Risk factors: Global biomedical investment and financing fell short of expectations, the company's post-clinical/commercial project volume fell short of expectations, gross margin risk continued to decline, and production capacity investment fell short of expectations.

Profit forecast, valuation and rating: Considering that the company is still in the capacity building stage, with depreciation of production capacity, labor costs, and increased investment in R&D expenses, we adjusted the company's 2023-2025 EPS forecast to 1.60/2.09/2.80 yuan respectively (the original forecast was 2.00/2.65/3.54 yuan). The corresponding PE price is 26X/20X/15X, respectively. Considering the impact of macroeconomic environment fluctuations and the decline in biomedical investment and financing on the demand side, the comparable company (Haoyuan Pharmaceutical, Bide Pharmaceutical, etc.) is 27 times PE valuation (Wind unanimous expectation), considering that the company's new drug discovery platform is based on a unique library of innovative drug molecular blocks, the number of the company's early projects continues to increase and commercialize, and is expected to lay the foundation for rapid performance growth as new production capacity is put into use; in addition, the number of novel molecular blocks continues to increase and maintain industry leadership (including deuterium-substituted drug molecules, PROTAC, ADC, and the rapid development and supply of molecular blocks related to new chemical entities such as oligonucleotides); at the same time, the company is built in combination with Various compound libraries and screening technology capabilities have completed the screening of multiple new targets. New drug research and development services continue to improve, which is expected to gradually bring new performance increases. We gave the company 40 times PE in 2023, corresponding to a target price of 64 yuan, and maintained a “buy” rating.