The company released its 2024 quarterly report: in the first quarter of 2024, the company achieved operating income of 3.198 billion yuan, an increase of 3.65%; net profit to mother was 244 million yuan, an increase of 1.84% year on year; net profit after deducting non-return to mother was 239 million yuan, an increase of 2.42% year on year. Profit margin improved quarter-on-quarter: 2024Q1 gross profit margin 24.04%, +1.57pct month-on-month, -3.92pct; 2024Q1 net profit margin 7.62%, +0.76pct month-on-month, -0.14pct yoy.

The profit margins of the three major businesses all increased month-on-month: in Q1 2024, the gross profit margin of the company's API business was 16.62%, +0.84 pct month-on-month, -4.08pct; CDMO's gross profit margin was 37.12%, +5.73pct month-on-month, and -6.38pct; pharmaceutical business gross margin was 56.07%, +2.52 pct month-on-month.

APIs: Stable performance, increasing the number of API DMFs in the future to further enrich the variety. In 2024, Q1, the API segment's revenue was 2,356 billion yuan, up 5.71% year-on-year. The market share and gross margin of the company's core products have been rising steadily. On the one hand, the company has further improved operational efficiency and reduced production and operation costs; on the other hand, the company continues to promote process technology improvements and continuously reduce product manufacturing costs. At the same time, the company expects to significantly increase the number of DMFs in the API, which is expected to increase by 30-50 within 3-5 years. In the future, the company's API business will rely on technology and cost advantages to develop more new varieties to ensure the continuous steady growth of the API business.

CDMO: Empowered by multi-technology platforms, the number of projects continues to increase. In Q1 2024, the CDMO segment's revenue was 500 million yuan, down 12.57% year on year. After deducting the impact of special projects in the first quarter of the year, the year-on-year growth continued. The company's technology platform is continuously being improved to support many business developments. For example, synthetic biology, enzyme catalysis, and fluid chemistry technology platforms have been widely used in many CDMO projects; the peptide technology platform has also made substantial progress; and the company is also focusing on building PROTAC and ADC technology direction capabilities.

In terms of the number of projects, 330 projects were quoted in the first quarter, up 34% year on year; 814 projects were in progress, up 41% year on year. Among them, there were 302 commercialization projects, up 29% year on year (including 218 human drug projects, 47 veterinary drug projects, and 37 other projects); 512 R&D projects, up 63% year on year. There are a total of 89 API projects, an increase of 39% over the previous year; of these, 18 have entered production and commercialization, 13 are in the verification stage, and 58 API projects are in the R&D stage.

Formulation: Develop multi-product and multi-channel strategies, and continue to increase investment in formulation research and development. In 2024, the Q1 formulation segment generated revenue of 342 million yuan, up 20.08% year over year. The company sets up and develops more than 25 formulation projects every year, and is at the stage of significant growth of ANDA. At the same time, the company is further developing the market by exploring potential varieties, such as the exclusive variety of traditional Chinese medicine wound healing ointments, and actively carrying out real-world research on a number of key products. In terms of research and development, the company continues to increase investment, including consistent evaluation of generic drugs, research and development of four new types of drugs, peptides and biosimilars. The key layout of peptide products is expected to enter clinical trials in October this year.

Maintain a “Highly Recommended” investment rating. The company's performance grew steadily on the basis of a high base in the same period last year, and the profitability of the three major businesses improved month-on-month, which is optimistic about the company's development prospects. We expect the company's net profit to be 11.7/13.4/1.56 billion yuan in 2024-2026, with a year-on-year growth rate of 10%/15%/17%, corresponding PE of 13/11/10 times, maintaining the “Highly Recommended” rating.

Risk warning: risks such as changes in industry policies, drug development registration, environmental protection and safety, increased market competition, and geopolitics.