Core views
The company released its semi-annual report for 2023. Under short-term pressure from Q1, Q2 resumed growth. In the first half of the year, it achieved revenue of 362 million yuan, an increase of 11% over the previous year, achieved net profit of 85.98 million yuan, an increase of 40% over the previous year, after deducting net profit of 70.48 million yuan, an increase of 22% over the previous year.
In a market where competition in the industry is fiercely intense, an additional contract amount of 649 million yuan was achieved, an increase of 70% over the same period last year, and new orders continued to grow rapidly. The new contracts mainly came from orders from pharmaceutical companies and biotech companies in China. And the rapid increase in new orders also reflects the company's strong strength in the field of clinical CRO.
occurrences
On August 29, the company released its semi-annual report for 2023. 2023H1 achieved operating income of 362 million yuan, an increase of 11.02% over the previous year, achieved net profit of 85.98 million yuan, an increase of 40.23% over the previous year, and achieved net profit of 70.48 million yuan after deducting non-return net profit of 70.48 million yuan, an increase of 21.88% over the previous year. Non-recurring profit and loss mainly came from investment income. At 2023H1, the company achieved an additional contract amount of 649 million yuan, an increase of 69.78% over the same period last year. In 2023, Q2 achieved revenue of 210 million yuan, an increase of 29.04% over the previous year, achieved net profit of 57.18 million yuan, an increase of 65.47% over the previous year, and achieved net profit of 501.8 billion yuan after deducting non-return net profit of 501.8 billion yuan, an increase of 53.49% over the previous year.
Brief review
Q2 Performance grew rapidly, and the first half of the year was in line with the company's expectations
23Q1 was still greatly affected by the liberalization of the epidemic at the end of the 22nd, and the company's revenue showed a year-on-year decline. After returning to normal in Q2, the company's revenue grew rapidly, driving the company to achieve revenue of 362 million yuan in 23H1, an increase of 11.02% over the previous year, a year-on-year increase of 85.98 million yuan, an increase of 40.23% over the previous year, and achieved net profit of 70.48 million yuan after deducting non-returning net profit of 70.48 million yuan, an increase of 21.88% over the previous year. Non-recurring profit and loss included investment income of 14.08 million yuan. The Q2 company achieved revenue of 210 million yuan, an increase of 29.04% over the previous year, achieved net profit of 57.18 million yuan, an increase of 65.47% over the previous year, and achieved net profit of 501.8 billion yuan after deducting non-return net profit of 501.8 billion yuan, an increase of 53.49% over the previous year. The faster profit growth rate than the revenue growth rate is mainly due to the fact that while the company's interest income and investment income all increased significantly, the sales expense ratio, management expense ratio, and R&D expense ratio decreased by 0.11, 0.95, and 1.27 percentage points year-on-year, and the company's profitability increased.
Looking at each section, all segments of 2023H1 Company increased. Among them, clinical trial operation service revenue was 181 million yuan, up 7.55% year on year, accounting for 50% of revenue; clinical trial site management service revenue was 188 million yuan, up 17.46% year on year; data management and statistical analysis service revenue was 36 million yuan, up 3.16% year on year; biological sample testing service revenue was 024 million yuan, up 24.4% year on year; clinical pharmacology service revenue was 118 million yuan, up 28.6% year on year; clinical pharmacology service revenue It was 115 million yuan, an increase of 2.28% over the previous year.
New orders are growing rapidly, demonstrating the company's comprehensive strength
In 2022, due to the impact of external environment and market changes on the company's overall operation and expansion, 813 million new orders were signed throughout the year. In the first half of 2023, with investment and financing in the innovative pharmaceutical industry still declining, market demand weakening, and industry competition intensifying, the company actively developed business and achieved an additional contract amount of 649 million yuan, an increase of 69.78% over 382 million yuan in the same period last year. The new contracts mainly came from orders from pharmaceutical companies and biotechnology companies in China.
And the rapid increase in new orders also reflects the company's strong strength in the field of clinical CRO.
Strong expert team+excellent professional ability to protect the company's long-term development. The company's various businesses are led by well-known experts at home and abroad. Chief Scientific Officer Dr. Chen GANG has served as the head of statistical review at the FDA and Johnson & Johnson. Chief statistician Dr. HE KUN has worked at the FDA Drug Review Center for more than 10 years. He has served as a statistical reviewer, expert reviewer, authoritative expert reviewer, review team leader, and deputy director of the Statistics Center. The company's expert team has participated and is participating in the discussion and formulation of many countries, industry guidelines, and standards. Dr. Chen GANG and Dr. HE KUN were the main authors and participated in drafting the draft for comments on the “Guiding Principles for Adaptive Design for Drug Clinical Trials”. The guidelines were published by the Drug Evaluation Center of the China State Drug Administration on May 13, 2020.
The company's core competitive advantage is centered on “scientific”, and maintains a high standard from clinical trial design to execution. The “Innovative Pharmaceutical Science and Strategy Committee” has been set up to provide domestic and foreign customers with specialized and personalized R&D strategies, top-level design, data interpretation, application preparation and other related services to help pharmaceutical R&D enterprises improve R&D success rates, shorten R&D cycles, reduce R&D risks, and save R&D expenses. Currently, 100% of drugs and device varieties that have been successfully registered or approved for the NDA through the company and for which the sponsor has applied for an NDA have been successfully registered or approved.
Future outlook: Using numerical integration as an entry point, companies actively developing overseas business continue to expand innovative services, actively lay out innovative clinical trial technology, and actively expand global expansion. The company established R&G US INC in the US in 2019. Under the leadership of Chief Statistician Dr. HE KUN, the company set up an overseas statistics team using the data integration business as an entry point, and actively undertakes data statistics and analysis services for overseas MNC and Biotech companies. Affected by the COVID-19 pandemic, the company's revenue for 202H2 declined slightly compared to 202H1. With the gradual recovery of various businesses this year, 23H1 achieved steady growth both year-on-year and month-on-month. Combined with the company's excellent top-level design capabilities and excellent operating capabilities, the growth rate of various business segments is expected to increase further in the second half of the year. Among them, the gross margin of the SMO sector 23H1 reached 29.6%, an increase of more than 7 percentage points over the previous year. On the basis of continuing to expand the team, the company continues to implement various measures to reduce costs and increase efficiency, and gross margin is expected to remain stable. The gross margin of the digital integration business declined last year due to increased competition in the industry, etc., and this year is expected to improve as the company develops overseas business. Furthermore, as of 23H1, the company's total monetary capital and transactional financial assets exceeded 1.55 billion yuan. Adequate book cash also supports the company to actively seek potential mergers and acquisitions, further deepen the company's layout in the field of clinical CRO, and improve the company's service capabilities.
Financial analysis: The cost ratio remained stable. R&D investment increased steadily in 2023H1. The company's sales expense rate, management cost rate, and R&D expense rate were 2.09%, 8.35%, and 7.11%, respectively. The year-on-year changes were +0.19pp, +0.38pp, and -0.25pp. The sales and management expense rate increased slightly, and the R&D expense rate decreased slightly; 23Q2, the company's sales expense rate, management expense rate, and R&D expense rate were 1.72%, 7.27%, and 6.06%, respectively, year-on-year changes - 0.11pp, -0.95pp Also -1.27 pp, month-on-month changes -0.83 pp, -2.41 pp, and -2.37 pp. The cost rates for the period all decreased year-on-year, and the month-on-month decline was even greater, reflecting the improvement in operational efficiency and profitability through the company's series of cost reduction and efficiency measures. The financial expense ratio of 23H1 was -1.99%, a year-on-year decrease, mainly due to an increase in interest income after the company went public and raised capital.
Investment advice
The company focuses on clinical CRO services, has full-chain clinical trial service capabilities, and is optimistic about the company's recovery and long-term growth after the impact of the epidemic has been eliminated.
We believe that the company has a deep understanding of the clinical operation of innovative drugs and has experience in many benchmark projects. As the innovative drug industry's requirements for operation and trial design increase, the company's market position is expected to improve. We expect the company's operating income from 2023-2025 to be 779 million yuan, 938 million yuan, and 1,113 million yuan, respectively, up 22.2%, 20.4%, and 18.7% year on year. Total net profit will be 144 million yuan, 174 million yuan, and 210 million yuan respectively, up 26.7%, 20.7%, and 20.7% year on year. Corresponding PE will be 36 times, 30 times, and 25 times, respectively, maintaining the “buy” rating.
Risk analysis
Market competition increases risk: International CRO has set up branches in China, the domestic CRO industry is developing rapidly, market concentration is low, CRO companies are growing rapidly, and industry competition is intensifying; growth risk: The company's business scale is relatively small, and its ability to withstand market risks is limited. The business process may be affected by industry policies, market competition patterns, changes in customer demand, etc.; human resources risk: The clinical CRO industry is a talent-intensive industry, and specialized talents are relatively scarce. The company still has potential risks in stabilizing existing core technicians and key management personnel, and absorbing and cultivating the technical and management talents needed for the company's development; fund-raising management and project implementation risks: The company's initial capital raising will be used to develop the main business, but project implementation still needs to go through various aspects such as project design, construction, and talent training. Problems in major aspects may cause project implementation It poses a risk.
Litigation risk: On August 24, the company issued a “Notice Concerning Lawsuits Involving the Company, Subsidiaries, and Actual Controllers”, which mainly involved contract disputes between Zhong Dafang and the company, subsidiary, and actual controller. Currently, the case has been filed and accepted in the first instance, and no court hearing has yet been held. Currently, it is impossible to predict the impact on the company's profit and loss for the current period and after the period. The final actual impact is subject to the court's effective judgment.