Revenue and profit are simultaneously under pressure from the API business
The company announced 1Q24 results on April 24:1Q24 revenue/net profit/net profit after deducting non-net profit was 14.76/2.37/234 million yuan (-16/ -16/ -15% yoy), respectively. We estimate that the decline in performance was mainly due to downward pressure on industry prices. We are optimistic about the steady growth of the company's CDMO and the release of new business. We expect the company's 2024-2026E net profit of 12.33/14.61 billion yuan (+19.3/18.5/ 0.5% yoy), corresponding EPS of 1.37/1.62/1.63 yuan. Using the SOTP method, CDMO and API 2024 PE 17.25x and 16.12x (both are the same as comparable companies) will be given a target price of 23.45 yuan to maintain the purchase rating.
The gross margin rebounded month-on-month, and the expense ratio declined during the period
The gross margin of the 1Q24 company was 34%, down 3 pcts from the previous year, but increased by 4 pcts from month to month. We estimate that the gross margin fluctuation mainly reflects the pressure on the gross margin of the API business. 1Q24's sales/management/R&D expense ratios were 1.37/7.34/ 4.40% respectively, down from 2023 (1.48/8.07/ 5.99% in 2023), and fee control showed results. We expect the company's gross margin to remain stable throughout 2024, and the expense ratio to return to the historical average.
CDMO: Strong downstream projects, orderly commissioning of new production capacity
We estimate that the company's CDMO business will remain steady: 1) Strong growth in core downstream formulations: 1Q24, Entresto achieved sales revenue of US$1,889 million (+36% yoy), and Kisqali achieved sales revenue of US$627 million (+54% yoy). 2) New production capacity is being put into operation one after another: The first phase of the Ruibo Taizhou project (1500+ cubic meters) is expected to be put into operation in 2Q24; the second phase of the Ruibo US pilot plant is under construction.
New business: Formulations, peptides, and XDCs are expected to contribute new volume
The company's new business capacity building and project expansion have seen initial results: 1) Formulations: Ruihua Zhongshan has been handed over at 3M23. At this point, the company has basically established a formulation CDMO service system based on Ruihua Zhongshan, Kangchuanji Pharmaceutical, and Siwei Pharmaceutical; in 2023, the company provided services for more than 70 formulation projects for more than 40 customers; 2) Peptide: The peptide GMP production line was put into use in 1Q23; in 2023, the company completed the synthesis and delivery of dozens of peptides, including delivery of tens of million-grade IND projects; 3) Conjugated drugs:
The OEB5 grade GMP production line has been put into use; in 2023, the company completed the preparation and delivery of several conjugated pharmaceutical compounds.
Risk warning: The progress of downstream formulation releases fell short of expectations; the production transfer progress of overseas commercialized varieties fell short of expectations; the increase in the number of early projects fell short of expectations.