Incident: On November 23, 2023, Boteng Co., Ltd. and Shanghai Yingli Pharmaceutical jointly announced that they have reached a strategic partnership. The two sides will develop related business cooperation on raw materials (including pharmaceutical intermediates) and pharmaceutical preparation products for small-molecule innovative drugs.

This marks the deepening of the cooperative relationship between the two sides since 2020 to a new stage of development, and is also an important milestone in the friendly and win-win cooperation between the two sides.

The growth rate slowed in the third quarter. The deep binding between CRO companies and pharmaceutical companies was actually a good strategy. The company's revenue for the first three quarters was 3,037 billion yuan, a year-on-year decrease of 41.79%. The company's net profit for the first three quarters was 452 million yuan, a year-on-year decrease of 71%. The main reason for the decline in profit indicators was the completion of the company's major order delivery, which led to a year-on-year decline in revenue. Furthermore, the new business and capabilities of the company's layout have yet to generate positive profit contributions, and the participating companies in the company's strategic layout are still at a loss stage.

In the current cold winter of investment and financing, pharmaceutical companies are taking a more cautious approach to R&D investment, so CXO performance has been greatly affected, and the growth rate of the entire CXO circuit has slowed down. In this context, CXO has reached strategic cooperation and deep binding with pharmaceutical companies, which is a good strategy to break out of slow growth.

The macromolecule platform and overseas layout are potential performance growth points for the company:

1. Traditional business Small molecule APIs CDMO business continues to grow

In the first three quarters of 2023, the company provided CDMO services for about 300 customers around the world and introduced 77 new domestic and foreign customers (28 in North America, 40 in China, 5 in Europe, and 4 in the rest of the Asia-Pacific region). In the first three quarters of 2023, the company signed 592 orders (excluding J-STAR), an increase of about 32% over the previous year; the number of delivered projects was 448, an increase of about 35% over the previous year.

In the first three quarters of 2023, the company's service API products were 144, an increase of 17 over the previous year; API products achieved revenue of 339 million yuan, an increase of about 31% over the previous year. At the same time, the company continued to introduce process validation projects (PV projects for short), completed the delivery of 11 PV projects in the first three quarters, and 13 PV projects were under implementation.

2. The pharmaceutical CDMO, synthetic macromolecule, and clinical CGT business is an important driver of growth. In the first three quarters of 2023, the company's formulation team provided formulation CDMO services to 80 customers, with 119 service projects. The order amount for new formulations was about 144 million yuan, an increase of about 211% over the previous year.

With the construction and implementation of synthetic macromolecule capabilities, in the first three quarters of 2023, the company undertook synthetic macromolecule services for 9 customers and achieved revenue of 1.96 million yuan.

Affected by the cold winter of financing in the pharmaceutical industry, the company's gene cell therapy CDMO business did not perform well in terms of signing new orders and fell short of expectations at the beginning of the year. In the first three quarters, Boteng Biotech introduced 44 new customers, 64 new projects, and signed new orders of about 58 million yuan, a year-on-year decrease of 46%. However, the company signed the first cell therapy clinical project order to help customers advance clinical trials and future commercial production of cell therapy products, and achieved zero breakthroughs in clinical gene cell therapy projects.

3. The company accelerates the pace of ADC tracks and overseas layouts

ADC is leading a new era in oncology treatment and is the focus of pharmaceutical companies' layout. Following this trend, the company established a biomacromolecule center in Waigaoqiao, Shanghai to provide customers with CMC services such as pharmacogenicity research, upstream and downstream process development, ADC coupling process development, formulation development, analytical method development, and verification of antibodies and antibody-conjugated drugs (ADC). The development of ADC drugs has just entered a golden age, and Boten's integrated layout will surely help the company gain a foothold on this racetrack.

In addition, the company put into operation a new crystallization and formulation development site in New Jersey, USA. The site has a construction area of nearly 4,000 square meters, three flexible and modular formulation GMP facilities, and is also equipped with a dedicated GMP spray drying workshop and a GMP pharmaceutical intermediate workshop. After the new site is put into operation, the company's integrated service capabilities for APIs and formulations will be further enhanced. Building factories overseas is closer to customers, which helps Boteng to obtain large overseas orders.

Profit forecast and investment rating: Based on the analysis of the company's core business sector, we expect revenue of 2023-2025 to be 3.89 billion/3.93 billion/4.57 billion, with year-on-year growth rates of -44.7%/1%/16.3%, respectively; net profit to mother of 570 million/580 million/790 million yuan, respectively. With the completion of the layout of overseas and emerging ADC and macromolecule businesses, we are optimistic about long-term development potential. Give it a “buy” rating.

Risk warning: The risk of a decrease in the number of large orders, increased risk due to intense competition in CDMO, industry regulation and policy risks.