Key points of investment:
The company is a leading SMO enterprise in China. It has advantages in terms of talent team, academy coverage capacity, project experience, etc., and is expected to fully benefit from the expansion and concentration of the SMO industry.
China's leading professional SMO enterprise
The company has focused on clinical trial site management (SMO) business for more than ten years, with comprehensive institutional coverage and rich project experience. It is a leading SMO enterprise in China. According to Shipai Health's prospectus, in 2021, the company was the second largest SMO company in China, with a market share of about 7.29%. In 2016-2022, the company maintained a compound growth of more than 40% in revenue and nearly 50% of net profit from the mother, with excellent performance. As of the first half of 2023, the company still has 1,754 billion yuan of orders in hand, which is expected to guarantee the steady growth of the company's performance.
China's SMO industry still has a lot of room for development
SMO mainly serves researchers in clinical trial institutions. As the regulatory nature of clinical trials in China is brought into line with the international level, the market size has benefited from increased research and development of new drugs and continued to expand. According to Insight Consulting data, in 2015-2021, the market size of China's SMO industry increased from 1.1 billion yuan to 6.9 billion yuan, with a CAGR of 35.80%. It is expected to grow to 35 billion yuan by 2030, with a 9-year CAGR of 19.77%.
Referring to Japan, where the SMO industry is more mature, we believe that there is still plenty of room for growth in the Chinese SMO market in the future, and market concentration is expected to increase further.
The company's comprehensive strength is strong, and operating efficiency continues to improve
Talent team, academy coverage capacity, and project experience are important indicators for measuring SMO's strength. As of the third quarter of 2023, the company has more than 3,900 business personnel, can cover more than 1,300 clinical trial institutions, and has implemented more than 2,800 SMO projects, leading the industry. Based on years of project practice and experience accumulation, the company has created a unique SOP system, which can ensure project compliance and efficient implementation, and achieve zero project withdrawal in the “722 incident”. In recent years, the company has continued to increase investment in R&D, continuously change technical systems, and drive continuous improvement in labor efficiency through refined personnel management, further highlighting its competitiveness.
Profit Forecasts, Valuations, and Ratings
We expect the company's revenue for 2023-2025 to be 795/10.85/1,382 million yuan, corresponding growth rates of 36%/37%/27% respectively, net profit of 1.30/1.84/242 million yuan, corresponding growth rates of 79%/42%/31% respectively, EPS of 2.12/3.01/3.95 yuan, and 3-year CAGR of 49.44%.
The DCF absolute valuation method measured that the company's value per share was 81.57 yuan, and the average PE of a comparable company was 24 times. Given that the company is a leader in the SMO industry, the market share is expected to increase further. Based on the absolute valuation method and relative valuation method, we gave the company 27 times PE in 2024, corresponding to the target price of 81.19 yuan, covering the first time, and giving it a “buy” rating.
Risk warning: increased competition in the industry; market demand falls short of expectations; risk of brain drain; risk of policy changes.