Performance is growing rapidly, and the share of innovative drugs has increased. First, new health insurance negotiations must exchange price for volume to drive long-term growth in the neurological sector. Differentiated products have been approved for marketing one after another, ensuring rapid growth in performance in the field of oncology. Revenue from the self-exemption sector continues to grow, and Xianoxin's sales channels are widely spread. Operating expenses are reasonably controlled, and the sales expense ratio continues to decline. R&D innovation continues to accelerate, and the research pipeline is rich. Using the absolute valuation method, the reasonable equity value of the company was calculated through the DCF model of HK$29.975 billion, corresponding to the target price of HK$11 in 2023, maintaining the “buy” rating.
Performance is growing rapidly, and the share of innovative drugs has increased. The company announced the 2023 interim results announcement (unaudited). 2023H1 achieved operating income and net profit of 3.379 billion yuan and 2,275 billion yuan, +25.2% year-on-year and +3466.17%. The company achieved rapid growth in revenue, mainly due to the innovative drug business; the company's net profit to parent increased significantly, mainly due to changes in the fair value of the investment portfolio held by the 2023H1 company and the impact of disposal of non-recurring accounts such as subsidiaries; after deducting the influence of non-recurring accounts, 2023H1 achieved operation-related profit of 395 million yuan, +0.5% year-on-year, and the overall profit side was stable.
2023H1's innovative drugs achieved revenue of 2,413 billion yuan, +36.6% year-on-year, accounting for 71.4% of revenue, which is the main driving force for performance growth.
First, new health insurance negotiations must exchange price for volume to drive medium- to long-term growth in the neurological sector. 2023H1, the company's neurological sector achieved revenue of 1,055 million yuan, accounting for 31.2% of total revenue, -1.5% year-on-year. We determined that the company's core product, Bixin, experienced a high price drop (-32.4%) in health insurance renewals, which led to a flat short-term income, but as the price was exchanged for volume and market influence gradually increased, the future is expected to usher in a new round of rapid expansion. Furthermore, the company's Xianbixin sublingual tablets are already in the NDA stage. After marketing, it is expected that sequential therapy will be formed with Xianbe New to further expand coverage of the course of stroke.
Differentiated products have been approved for marketing one after another, ensuring rapid growth in performance in the field of oncology. At 2023H1, the company achieved revenue of 783 million yuan in the oncology sector, accounting for 23.2% of total revenue, +34.8% over the same period last year. The company focuses on innovative oncology drugs with differentiated competitive advantages. According to the company's performance report, Nvida, as the world's first PD- (L) 1 antibody administered subcutaneously, was rapidly dosed after marketing with advantages in terms of convenience and safety; trazilicil exerts a myeloprotective effect on tumors that are not sensitive to CDK4/6. There are no similar competitive products on the market, and the clinical prospects are broad. It has been approved and listed in China in February 2023; Endo expands new indications of malignant thoracic abdominal fluid, and is expected to bring in a new round of release. In addition, many of the company's subsequent research pipelines have first-in-class potential or best-in-class potential, including a new-generation VEGF monoclonal antibody (survicitamab) with high efficiency and low toxicity, a global first-in-class TNFR2 monoclonal antibody (SIM0235), an oral SERD (SIM0270) with brain-penetrating properties, a PRMT5 inhibitor (SIM0272) with high inhibitory activity and high selectivity, and PD-L1/ IL15 dual antibody (SIM0237) etc.
Revenue from the self-exemption sector continues to grow, and Xianoxin's sales channels are widely spread. In 2023H1, the company achieved revenue of 659 million yuan in the autoimmunity sector, accounting for 19.5% of total revenue, +30.0% year-on-year. As a traditional synthetic anti-rheumatic drug to relieve the condition, Alamod continues to be rich in clinical evidence, continues to improve its treatment status, and expand new indications for dry syndrome. According to the company's performance report, the IL2 fusion protein SIM0278 under development completed a major transaction to license Almirall S.A. overseas, demonstrating the product's excellent clinical potential. Furthermore, in the anti-infective field, since Nuoxin was approved for marketing, it has covered 32 provinces, 306 cities, and over 2,500 hospitals across the country, building a commercial supply capacity of millions of people per month.
Operating expenses are reasonably controlled, and the sales expense ratio continues to decline. In 2023H1, the company's sales, management, and financial expense ratios were 36.9%, 7.6%, and 0.5%, year-on-year, -1.1, +0.6, and -0.1 PCTs. The overall cost rate was well controlled during the period, and the sales expense rate continued to decline. As the company's share of innovative drug revenue continues to increase and the scale effect continues to be highlighted, it is expected that the company's cost side will continue to be optimized in the future.
R&D innovation continues to accelerate, and the research pipeline is rich. 2023H1. The company's R&D expenses were 776 million yuan, +19.1% year-on-year, accounting for 23.0% of total revenue. The company uses self-development+BD two-wheel drive and continues to focus on high-quality innovative drug research and development. Currently, it covers more than 60 innovative drug research and development pipelines. Among them, products such as Sublingual Tablets, CMAB009, suvacitazumab, and dalilasen are already in the NDA/critical clinical stage.
Risk factors: risk of the company's product price reduction; risk that the company's product development progress falls short of expectations; risk that the company's product volume falls short of expectations; risk that the company's product launch progress falls short of expectations; risk of technology upgrades and product iteration; intellectual property risk.
Profit forecasting, valuation and rating: The company focuses on differentiated innovation, self-development+cooperative two-wheel drive, innovation and transformation continues to accelerate, and many major pipelines have entered a harvest period. In line with the company's 2023H1 performance announcement, considering the short-term impact of non-recurring profit and loss accounts on the company's performance, we adjusted the company's net profit forecast for 2023/24/25 to 1,792 million/1,327 million/1,606 billion yuan (the original forecast was 1,001 billion/130 billion/1,547 billion yuan. The increase in predicted net profit in 2023 was mainly due to the impact of 23H1 non-recurring revenue). Using the absolute valuation method, the company's reasonable equity value is estimated at HK$29.975 billion through the DCF model, of which β=1.05 (the average value of Hengrui Pharmaceutical, China Biopharmaceutical, and Hanson Pharmaceutical is 0.85. Considering that the company's innovative drug revenue share is higher and that investment in innovation and transformation is relatively high, beta has appropriately risen), WACC = 7.95% (Rf takes 2.6% yield on 10-year treasury bonds, Rm takes Shanghai and Shenzhen 300 compound yield rises slightly, risk premium is 6.0%, tax rate is 15%), considering the company's subsequent pipeline layout 5%, Corresponding to the 2023 target price of HK$11, maintaining the “buy” rating.