Orient has built a leading R&D and production platform for small molecules, peptides, and oligonucleotide drugs. It has gradually extended from APIs to pharmaceuticals, and has established a product chain covering the six major fields of respiratory system, cardiovascular, anti-infection, nervous system, anti-tumor, and women's health. We believe that the company's core raw materials have a leading global market share, and have formed a diversified product echelon with high barriers, a good competitive pattern and strong growth; after the launch of the first pharmaceutical product, drogesterone tablets, are entering a rapid release period, which is expected to be an important driving force for the company's performance; and the advance layout of the peptides and small nucleic acid fields has also laid a solid foundation for the long-term growth of the company's performance. In summary, we gave the company 42 times PE in 2023, corresponding to the target price of 31 yuan, to maintain the “buy” rating.

The API business is clearly picking up, and didrogesterone tablets are rapidly being released. The company's operating income for the first three quarters of 2023 was 923 million yuan, +19.97% year-on-year; net profit of 233 million/195 million yuan, net profit for the first three quarters of the year was 233 million/195 million yuan, +24.76%/+6.68% over the same period last year. Single Q3 operating income was 370 million yuan, +42.25% year-on-year; net profit of 137 million yuan/101 million yuan (non-recurring profit and loss was mainly investment income from the sale of Guangzhou Zhuotide's shares of RMB 31.99 million), +96.18%/+44.52% over the same period last year. According to the company's three-quarter report telephone conference, the company achieved sales revenue of about 48 million yuan (approved on June 27, 2023). We expect didrogesterone tablets to be the first in China and are expected to become an important driving force for the company's performance growth in the next 2-3 years. Excluding didrogesterone tablet revenue, the company's Q3 API revenue increased by about 20% year on year, a significant recovery from 23H1 (23H1 company's revenue increased 8.59% year on year).

Thanks to the expansion of the high-margin pharmaceutical business, the company's profitability has increased significantly. In terms of profitability: In the first three quarters of 2023, the company's gross marginal profit/net interest rate/ net interest rate after deduction of non-return net interest was 55.64%/25.21%/21.12%, year-on-year +5.87/+0.97/-2.63 pcts; Q3 gross margine/net interest rate/ net profit margin minus non-return margin was 64.37%/36.94%/27.24%, year-on-year +17.92/+10.16/ +0.43pcts. We judge that the gross margin of the company's pharmaceutical business is significantly higher than that of the API business, so the company's overall gross margin increased markedly after didrogesterone was released.

The launch of didrogesterone tablets led to an increase in sales expenses. In terms of expense ratio, the company's sales/management/R&D/finance expense ratio for the first three quarters of 2023 was 7.29%/13.15%/10.37%/-0.80%, respectively, compared with +3.57/+1.85/-0.18/+3.45pcts (total +8.69pcts). We believe that the company set up a pharmaceutical sales team after the launch of didrogesterone tablets, and the overall sales cost ratio is expected to increase.

Capacity development: On June 29, 2023, the company issued the “Proposal for Issuance of Convertible Corporate Bonds to Unspecified Targets”. Among them, the fund-raising projects are: ① 308 tons of specialty APIs and 200 million anti-tumor drugs (phase I), ② production line and supporting facilities construction project with an annual output of 300 kg of semeglutide and 20 tons of parovade (phase I), and ③ annual production line construction of 300 million estradiol/estradiol didrogesterone composite packaging tablets and 300 million doxiclavir sodium tablets (phase I). According to the company's three-quarter report telephone conference, 308 tons of specialty APIs and 200 million anti-tumor drug projects have been built in the new factory area of Cangshan, Tiantai; the company expects the 300kg Simeglutide API production line to be completed in the first half of 2024, which is expected to make a positive contribution to revenue in 2025.

Risk factors: industrial policy changes and drug price reduction risk; drug quality control risk; risk of R&D progress falling short of expectations; risk of international trade friction; risk of fund-raising projects not progressing as expected.

Investment advice: Orient has built a leading R&D and production platform for small molecules, peptides and oligonucleotide drugs, gradually extending from API/intermediates to formulations, and has established a product chain covering the six major fields of respiratory system, cardiovascular, anti-infection, nervous system, anti-tumor, and women's health. We believe that the company's core raw materials have a leading global market share, and have formed a diversified product echelon with high barriers, a good competitive pattern and strong growth; after the launch of the first pharmaceutical product, drogesterone tablets, are entering a rapid release period, which is expected to be an important driving force for the company's performance; and the advance layout of the peptides and small nucleic acid fields has also laid a solid foundation for the long-term growth of the company's performance. Considering that didrogesterone tablets have begun to be released rapidly, we adjusted the company's EPS forecast for 2023-2025 to 0.73/0.95/1.27 yuan (originally 0.55/0.74/1.00 yuan), and the current price corresponding to PE is 34X/26X/20X, respectively. Referring to current comparable companies (Shengnuo Biotech, Notai Biotech, and Aoxiang Pharmaceutical, based on Wind's unanimous expectations), the average PE in 2023 was 42 times, giving the company 42 times PE in 2023, corresponding to the target price of 31 yuan, maintaining the “buy” rating.