1H23 performed better than we expected

The company announced 1H23 results: revenue of 3.21 billion yuan, an increase of 148.1% over the previous year; net profit of 1.03 billion yuan (1H22 was a loss of 32.8 million yuan). As Kewei's sales picked up at an accelerated pace, the company's performance exceeded our expectations.

Development trends

All business sectors have shown good growth, and Kewei has recovered significantly. 1H23,1) Antiviral drugs: Kewei's revenue was 2.88 billion yuan (+186% YoY), mainly benefiting from the recovery of diagnosis and treatment in terminal medical institutions, Kewei's brand strength, and supply chain system advantages. Granules/capsule dosage revenue was 2.43 billion/450 million yuan (+249%/+46% YoY), and grade hospitals/retail/primary level/e-commerce accounted for 40%/30%/18%/13%. The company expects to maintain a sales share of more than 80% of the domestic oseltamivir market in 2023. 2) Endocrine and metabolic drugs: Revenue was 60.49 million yuan (+42% YoY), of which phenbromalone tablets earned 37.7 million yuan (-3% YoY). The revenue of Insulin Glazin 1H23 increased 532% year over year (2Q23 increased 131% month on month), and the company expects to occupy more than 20% of the Glaxis Insulin market for a long time. 3) Anti-infective drugs: Revenue was 55.01 million yuan (+31.9% YoY), of which moxifloxacin hydrochloride tablets earned 22.7 million yuan (+45% YoY). In the hepatitis C business, imitavir entered health insurance in December 2021. 1H23 revenue increased 220% year on year, and 2Q23 revenue increased 64% month on month. 4) Cardiovascular drugs: Revenue was 83.85 million yuan (+9.9% YoY), of which telmisartan tablets earned 37 million yuan (+18% YoY).

Actively promote research pipelines for chronic diseases and anti-virus diseases. 1) Chronic disease: Junglitrine is expected to be approved in 2023; the company expects to be approved in 2024; liraglutide is awaiting a marketing application, and the company expects to be approved in 2025; the parent company's potential FIC drug HEC88473 (FGF21/GLP-1 inhibitor) diabetes indications have completed phase I clinical trials in Australia and started phase II clinical trials domestically. The company expects to complete phase II clinical trials next year, and further indications may be expanded. 2) Antiviral: The new full-genotype hepatitis C drug Yingqiangbuvir and antetamivir (parent company) NDA were all accepted in August this year, and the company expects to be approved in 2024. In the field of hepatitis B, the parent company has set up a small nucleic acid drug platform, and mofixedine mesylate is in phase III clinical trials.

3) Antineoplastic (parent company): rilotinib (EGFR inhibitor, treatment of esophageal squamous cell carcinoma) and clifotinib (FLT3 inhibitor, treatment of acute myeloid leukemia) are all in clinical phase III.

Profit forecasting and valuation

As Kewei's volume exceeded expectations and 1H23's fee rate dropped significantly, we raised our 2023/2024 EPS forecast by 29%/25% to 1.78/2.18 yuan. The current stock price corresponds to 3.2 times the 2023 price-earnings ratio and 2.5 times the 2024 price-earnings ratio. Maintaining an outperforming industry rating, due to a downward shift in the valuation center of the pharmaceutical sector, the target price of HK$9.5 remained unchanged, corresponding to 4.8 times the 2023 price-earnings ratio and 3.8 times the 2024 price-earnings ratio. There is 49% upside compared to the current stock price.

risks

Relying on a single product, R&D progress fell short of expectations, and policy suppression of prices exceeded expectations.