The first half of the year and the second quarter after deducting non-profits fell short of our expectations
The company announced 1H23 results: revenue of 21.4 billion yuan, +0.2% year-on-year; net profit attributed/non-attributable to parents was 1,78/1.37 billion yuan, respectively, +15.7%/-26.3%. Looking at the second quarter alone, revenue was 10.5 billion yuan, or -4% year-on-year; net profit attributed/non-attributable to parents was 79/450 million yuan, respectively, -26.3%/-57.3%. Affected by factors such as the year-on-year decline in anti-epidemic products, increased competition in the US market of Gland Pharma and the discontinuation and upgrading of some production lines, and the increase in financial expenses and exchange losses due to interest rate hikes and appreciation of the US dollar, net profit for the first half of the year and the second quarter was lower than our expectations.
Development trends
Regular business is relatively stable. 1H23:1) Pharmaceutical revenue was 1.6 billion yuan, +11.6% year-on-year. The company said it mainly came from an increase in new and sub-new products. Hans has earned 560 million yuan, has a commercial team of 550 people, and has completed networking in 29 provinces; Han Qu You's revenue is +57% over the same period; and Ikeda has treated more than 500 patients. Sales of the COVID-19 mRNA vaccine have declined, but azivudine still has some contribution. The company said that Gland Pharma carried out normal production line upgrades in the first half of the year and has now resumed accepting orders, but competition in the US market is becoming increasingly fierce. 2) Medical device revenue was 2.2 billion yuan, or -45% year-on-year, mainly due to the decline in anti-epidemic services such as nucleic acid antigens. Da Vinci has installed 34 surgical robots, with a total installed capacity of over 330. Healthcare service revenue was 3.1 billion yuan, +7% year-on-year; the division lost 270 million yuan, a year-on-year loss of 170 million yuan. At the overall level of the company, regular business revenue +15% after excluding anti-epidemic products. The company also stated that it has always attached importance to compliance management. The recent medical industry rectification has had limited impact on the company as a whole, and promotion of new products may be delayed.
Innovation continues to advance. In terms of research pipeline, Ikaida was approved domestically for second-line indications of r/r LBCL in June; slulizumab was approved domestically as ES-SCLC in March, making it the world's first PD-1 monoclonal antibody approved for first-line ESSCLC, and initiated ES-SCLC head-to-head bridging clinical trials in the US, and the European listing application has been accepted by EMA. Locally produced Da Vinci's surgical robot was approved for sale in June. Capra was approved for duodenal ulcers and reflux esophagitis in February. Etecapeptide was approved for secondary hyperthyroidism in dialysis patients in May. FS-1502 (HER2 ADC) initiated clinical phase 3 for breast cancer in March, and applications for the marketing of RT002 (long-acting botulinum toxin) for moderate to severe interbrow lines and adult neck dystonia were accepted by the State Drug Administration in 4/7, respectively.
Profit forecasting and valuation
Considering the year-on-year decline in anti-epidemic products and increased competition for generic drugs, etc., we lowered our 2023/24 net profit forecast by 27/ 33% to 33/35 billion yuan. The current price corresponds to 23/22 times the price-earnings ratio of A shares in 2023/24, and the price-earnings ratio of H shares 14/12 times in 2023/24. We maintain our outperforming industry ratings and consider the smooth progress of the innovation pipeline. We only lowered the A-share and H-share target prices by 10% to HK$38.7/HK$27.5, respectively. The target price of A shares corresponds to 32/30 times the price-earnings ratio in 2023/24, which has 39% room for an increase of 39% compared to the current stock price; the target price of H shares corresponds to a price-earnings ratio of 20/18 times in 2023/24, with 49% room to rise from the current stock price.
risks
The impact of collection exceeded expectations, R&D failed, internationalization fell short of expectations, and the competitive landscape worsened.