Event: On August 23, Heyuan Biotech released the 2023 mid-year report results. In the first half of the year, the company achieved revenue of 83.751 million yuan, a year-on-year decrease of 37.92%; net profit for the mother - 44.7979 million yuan, a year-on-year decrease of 323.70%; net profit after deducting non-net profit of 494.730 million yuan, a year-on-year decrease of 385.98%. In a single quarter, Q2 achieved revenue of 52.9596 million yuan, a year-on-year decrease of 14.28%; net profit from the previous year - 1.3546 million yuan, a year-on-year decrease of 264.08%; net profit after deducting non-net profit - 16.4985 million yuan, a year-on-year decrease of 357.01%.

Gene therapy CRO is growing steadily and increasing its market share. Gene therapy CRO revenue in the first half of the year was 3,3872 million yuan, an increase of 35.69% over the previous year. With the liberalization of the domestic epidemic policy, the research side of universities and hospitals is recovering rapidly, and demand for the company's CRO business continues to increase. Combined with the impact of the Shanghai epidemic in the first half of last year, the base for the same period last year was low, and the CRO sector maintained rapid growth in performance.

The short-term performance of gene therapy CDMO is under pressure, and the release of new production capacity in Lingang is conducive to improving profitability. Gene therapy CDMO revenue in the first half of the year was 44.3073 million yuan, down 58.55% from the previous year. It was mainly affected by the slump in biomedical investment and financing. Overall, the financing pressure on downstream customers increased, and they were cautious about promoting R&D pipelines, which led to delays in CDMO orders to varying degrees and a decline in short-term performance. Furthermore, competition in the domestic CGT CDMO industry has intensified, and the volume within the industry has also affected service prices. In order to cope with internal and external adverse factors: 1) Increase domestic and foreign business expansion: develop new domestic and foreign customers in various segments such as oncolytic virus, AAV gene therapy, CAR-T/NK, stem cells, etc., and mRNA. In the first half of the year, we supported the company's CDMO customers to obtain 7 new IND approvals, adding more than 130 million yuan in new orders; 2) Lingang production capacity release: The company already has 15 GMP gene therapy vector production lines and 20 various cell therapy production lines, which can provide customers with one-stop service from process development to commercial production. The first phase of the Lingang base plans 11 virus production lines and a 5,000 square meter cell production line. The company expects the first phase to be officially put into operation in the second half of 2023. Project orders are expected to resume rapidly, meeting the rapidly growing demand at all stages of R&D in all aspects.

Continue to increase R&D investment and deploy new gene therapy technology and capabilities. R&D expenses in the first half of the year were 243.38,800 yuan, an increase of 71.71% over the previous year. The R&D cost rate reached 29.06%. The number of personnel increased from 631 at the end of the previous year to 660 in the middle of this year, and the number of R&D personnel reached 140. The company has a comprehensive layout in cutting-edge non-viral vectors such as mRNA and exosomes, research and optimization of viral vectors, development of cutting-edge cell culture technology processes, and development of detection technology, etc., and continues to enrich the R&D team and enhance the market competitiveness of core technologies.

Investment suggestions: As a high-quality domestic gene therapy CRO/CDMO enterprise, the company continues to accelerate production capacity construction and continue to advance overseas business. We expect the company's net profit to be 0.10/0.25/49 billion yuan in 2023-2025, and PE to be 655/261/132 times, respectively, giving it a “Cautious Recommendation” rating.

Risk warning: Risk of changes in demand from downstream gene therapy customers, risk of increased competition in the domestic market, risk of commercialization of new drug development falling short of expectations, risk of iterative technology upgrades, and risk of regulatory policy changes.