Key points of investment:

Traditional business segments contribute to stable cash flow to the company. The company is mainly engaged in R&D, production and sales of recombinant protein drugs and microecological preparations. 90% of revenue in 2022 came from 4 products, namely human erythroid (epridine), human interferon α1b (Psilogin), human granulocyte stimulating factor (betaxi), and Clostridium butyrate biphenyte (Chang Lekang). The market share of these 4 products in their respective segments is leading. However, in the context of domestic collection, non-exclusive products are under pressure to reduce prices. By increasing coverage, carrying out long-term transformation of traditional products, and incubating new products, the company is expected to maintain the stability of business in traditional fields and contribute to stable cash flow to the company.

Mature overseas commercialization platform+rapid product introduction to create a second growth curve. According to IMS's forecast, the future growth rate of drugs in emerging markets will be higher than that of developed countries, becoming the main driving force for the growth of the global pharmaceutical market. Emerging markets have huge potential. Foreign biopharmaceutical companies are increasingly focusing on re-emerging markets, while domestic pharmaceutical companies are encouraged to actively explore emerging markets. After more than 20 years of overseas cultivation, Kexing has accumulated rich resources and commercialization experience in overseas product registration, overseas development and marketing, and overseas GMP compliance audits. It has already achieved market access and sales in about 40 countries and regions, including Brazil, the Philippines, and Indonesia. The sales network has covered 100% of the markets in emerging countries with a population of over 100 million. The company regards overseas commercialization as one of its important strategies. Currently, it mainly focuses on emerging markets, and will gradually expand to mature markets in the future. Since 2021, the company has rapidly expanded its product pool by introducing products, and has introduced 9 products. In terms of progress, the Egyptian Drug Administration has completed on-site GMP audits of infliximab and bevacizumab. The EU GMP certification on-site inspection of the large albumin paclitaxel production line will be carried out at the end of January 2024, and the Brazilian Drug Administration's on-site GMP audit of infliximab will be carried out in January 2024. If overseas registration proceeds smoothly, imported products will begin to be commercialized overseas in 2024.

Actively cultivate new industries in the bioeconomy. Actively cultivate and incubate new industries such as animal vaccines and synthetic biology, build novel genetically-engineered vector vaccine technology platforms and synthetic biotechnology platforms, and promote the development and industrialization of related products. Kexing Dongbao has completed the construction of 13 product pipelines and completed 3 product anti-virus protection tests. In terms of synthetic biology, two varieties of α-ketoglutaric acid and 5-aminoacetylpropionic acid have been introduced, which have broad application prospects and will enter mass production in 2023.

First coverage, giving a “buy” rating. The company is expected to achieve operating income of 1,394/15.45/1,912 billion yuan in 2023-2025, +6.0%/+10.8%/+23.8% year-on-year, and net profit of -0.7/0.08/108 billion yuan. The current stock price corresponding to 2024-2025 PE is 472X/37X. Using the FCFF absolute valuation method, Kexon Pharmaceuticals has a value of 24.84 yuan per share, corresponding to a market value of about 4.943 billion yuan. Compared with the current stock price (December 12), there is still 23% room to rise compared to the current stock price (December 12). It covered for the first time and gave it a “buy” rating.

Risk warning: risk of delays in overseas review progress, risk of sales volume falling short of expectations, risk of exchange rate fluctuations.