The company's main business is in good condition in the second half of 2023.
We recently visited Federal Pharmaceuticals, and the company's management said that the main business has been doing well since July. We expect revenue to grow by 21.0% to 13.71 billion yuan (RMB, the same below) in 2023, mainly due to: 1) the market demand for intermediates and APIs is picking up, and the total revenue of these two businesses is expected to increase by 25.0% to 13.71 billion yuan. 2) Insulin and animal protection business (veterinary drugs): although the revenue of the insulin business decreased by 19.6% in the first half of the year compared with the same period last year, sales increased significantly in the second half of the year compared with the same period last year, and the annual revenue is expected to slightly exceed earlier expectations and achieve positive growth. The animal insurance business received more orders from its main customer Muyuan shares in the second half of the year, and full-year revenue is expected to increase by 62.8 per cent year-on-year to about 1.3 billion yuan. Considering that the revenue from these two businesses will be slightly higher than we had expected, we slightly raised our forecast for the preparation business to 5.25 billion yuan (up 15.1% from the same period last year).
The research and development of diabetes drugs is progressing smoothly
There are a number of diabetes drugs in the company's R & D pipeline. The company's management said that the first GLP-1 agonist, rilarutide, has submitted an application for listing and is expected to be approved within 2024. In addition, according to the current progress, the company expects that long-acting insulin Degu insulin is expected to be approved for sale in 2025. With regard to the recent market concern, the company is currently conducting clinical trials, and diabetes and weight management indications are expected to be approved in 2025 and 2027, respectively. Due to the good effect of reducing blood sugar and weight loss and not easy to cause side effects such as hypoglycemia, domestic sales of GLP-1 agonists began to increase rapidly in recent years. At present, the market of GLP-1 agonists in China is dominated by imported drugs, and only East China Medicine (000963 CH) has just been approved in July 2023, so the Federal Pharmaceutical has a strong advantage if it is approved. The company is one of the companies listed in Hong Kong that have been approved for the clinical trial of Simiguelu. because of its excellent effect in reducing blood sugar and weight loss, it will be concerned by funds if the clinical data are good in the future.
Maintain the "buy" rating and raise the target price to HK $9.70
As the sales of the insulin and animal protection business in the second half of 2023 are expected to be better than our earlier forecast, the revenue forecast for 2023-25e will be raised by 2.1%, 1.7% and 1.9% respectively, and the shareholder net profit forecast will be raised by 0.4%, 1.2% and 0.3%, respectively. We raised our target price slightly from HK $9.68 to HK $9.70 to reflect the increase in earnings forecasts. Due to the recent rise in the company's share price, the rating has been adjusted from "buy" to "overweight".
Risk hints: 1) fluctuations in API prices may lead to lower-than-expected sales; 2) market competition for insulin products may intensify; 3) the progress of new drug research and development may be slower than expected.