1H23 after deducting non-net profit was slightly higher than our expectations

The company announced 1H23 results: revenue of $34 million; net loss of 1.64 billion yuan, including a book loss of $1.45 billion due to fair losses on convertible and redeemable preferred shares due to the listing of Hong Kong stocks. The net loss after excluding this project was about 190 million yuan. The performance was better than our expectations, mainly due to product volume being better than expected.

Development trends

Commercialization got off to a good start, and revenue was slightly better than expected. The company's 1H23 product revenue was 34.34 million yuan, a significant increase from 658,000 yuan in the same period last year, which is better than our previous expectations. The company is actively building a hair product brand matrix. Currently, there are 7 hair-related products on sale, covering everything from minoxidil spray to daily care. During the 618 campaign, the GMV of the company's hair disease and care products exceeded 9.4 million yuan, an increase of 4348% over the previous year. CUP-MNDE (French Little White Tube) ranked first in sales volume in the Tmall and Jingdong cross-border minoxidil single product SKU category, and cross-border e-commerce sales initially progressed smoothly.

The development of various pipeline products is progressing steadily, and follow-up clinical and application progress is being followed. Many of the company's pipeline varieties are being developed in the middle to late stages, and we expect to enter an intensive harvest period. According to the company's announcement, the main pipeline: 1) CU-40102 (finasteride spray) completed phase III lockdown in May 2023, and the company plans to complete primary endpoint readout and NDA submission in 4Q23; 2) CU-10201 (4% minocycline foam) completed phase III clinical primary endpoint reading in February 2023, and obtained CDE priority review approval in August 2023. The company plans to submit the NDA on 4Q23. In terms of early stage pipelines, CU-30101 (lidocaine tetracaine cream) completed phase III clinical trials in August 2023, and CU-40101 (topical small molecule thyroid hormone receptor agonist liniment) phase I clinical storage was locked up in August 2023. The company plans to complete the main endpoint reading in 4Q23. In addition, the company also plans to launch phase II clinical trials of CU-20401 (mutant collagenase) in 3Q23.

We have sufficient cash reserves and are included in various Hang Seng Indices. As of June 2023, the company has a cash balance of about 1.4 billion yuan. Considering that the company is entering the commercialization stage, we expect that current capital combined with potential operating cash flow can support its operating needs in the next few years. According to the company announcement, the company included 6 indices, including the Hang Seng Composite Index and the Healthcare Index, in the quarterly review of the Hang Seng Index in August 2023, and the adjustments will take effect on September 4. We expect that they will be included in the Hong Kong Stock Connect in the future.

Profit forecasting and valuation

As commercialization was slightly better than expected, we raised our 2023-2024 revenue forecast by 24%/12% to $0.75/ 120 million. Since the company recorded non-cash book losses due to the listing of Hong Kong stocks, we adjusted our 2023 net loss forecast from $320 million to $1.76 billion. After excluding the impact of this project, we adjusted our net loss forecast for 2023-2024 from $32/320 million to $30/300 million. Maintaining outperforming industry ratings, since commercialization was better than expected, according to the DCF model, we raised our target price by 21% to HK$35 (until the end of 2024), which is 18% upward from the current stock price.

risks

Product commercialization falls short of expectations; clinical progress falls short of expectations; risk of medical accidents.