Incident: The company released its semi-annual report for 2023, and has not yet achieved operating income; net profit from attribution - 165 million yuan, loss increased from the same period last year; net profit after deducting non-return net profit - 182 million yuan, loss increased over the same period last year; net operating cash flow - 129 million yuan, negative value narrower than the same period last year; EPS (basic) - 1.67 yuan. The performance is in line with market expectations.

Comment:

Core products are nearing commercialization, and the R&D pipeline is progressing in an orderly manner. 23H1 invested 148 million yuan in R&D, +21.62% over the same period. Currently, it has 13 innovative drug research projects under development, 12 are new drugs developed independently by the company, and 1 is a new drug introduced collaboratively. Of these, 4 products are under NDA review and various clinical stages (HC-1119, HP518, HP501 and HP558):

1) HC1119 (deuterium-enzalutamide): Mainly used for castration-resistant prostate cancer (mCrPC) (first-line); abiraterone/mCrPC after chemotherapy (second and third line). 23H1, whose clinical phase III data was selected for the 2023 American Clinical Oncology Annual Meeting (ASCO), and the HC-1119 marketing application was accepted by the NMPA in March 2023; global multi-center phase III clinical trials are ongoing;

2) HP501: Mainly used for hyperuricemia/gout. 23H1 has completed multiple phase I/II clinical trials, and is carrying out preparations related to phase III clinical trials, etc.;

3) HP518: Mainly used for castration-resistant prostate cancer. 23H1, Australia Phase I clinical trials have completed climbing in multiple dose groups, and the application for a dose expansion Ib study submitted in the US was approved in January 2023. The application for the HP518 clinical trial in China was accepted by the NMPA in August 2023.

4) HP558: Mainly used for esophageal cancer/solid tumors. 23H1 has completed phase I clinical trials in Europe and has been approved to conduct phase II clinical trials in China. As of June 30, 2023, the company has completed CMC's technical process transfer and clinical product production in China.

Establish an integrated closed loop of “R&D, clinical, production and commercialization” to comprehensively promote the commercialization process. The company has carried out preliminary marketing and product production layout work. In terms of product production preparations, the company has purchased industrialized land at Tianfu International Biotechnology City in Chengdu. The “R&D and Production Base Construction Project”, the company's fund-raising investment project, has passed the Sichuan Foreign Investment Project, obtained approval from the EIA, completed the energy efficiency review, obtained project land, and steadily promoted the construction of the GMP system.

Profit forecast, valuation and rating: Considering that the core product HC1119 in 2023 will leave the clinical stage domestically and will no longer incur clinical research and development expenses, we raised the 2023 return net profit to -407 million yuan (the original forecast was -462 million yuan); in 2024, HC1119 will enter the commercialization stage, and sales expenses will increase dramatically, so we lowered the net profit forecast for 2024 to 472 million yuan (the original forecast was 100 million yuan); the net profit forecast for 2025 was added to 84 million yuan. Considering the huge potential of the company's technology platform, the product layout ideas are leading, and the “buy” rating is maintained.

Risk warning: R&D progress falls short of expectations; policy changes pose a risk of price decline.