Incident: On April 25, 2024, Kanglong Chemical released its 2024 quarterly report. The company achieved revenue of 2,671 billion yuan in Q1, a year-on-year decrease of 1.95%; net profit to mother of 231 million yuan, a year-on-year decrease of 33.80%; and adjusted net profit of 339 million yuan, a year-on-year decrease of 22.70%.
Laboratory services have recovered month-on-month, and new orders from small-molecule CDMO have increased rapidly. Laboratory services achieved revenue of 1,605 billion yuan in Q1 2024, a year-on-year decrease of 2.92%, and gross margin remained at 44.14%.
New orders for the Q1 laboratory business increased by more than 10% year-on-year. The company integrated laboratories in Shanghai, Ningbo and other places to increase scale effects, and actively expand emerging fields such as oligonucleotides, peptides, antibodies, and ADCs.
The small-molecule CDMO business achieved revenue of 582 million yuan in Q1 2024, a year-on-year decrease of 2.67%, mainly due to the impact of the delivery pace of some customer projects; gross margin was 27.90%, a year-on-year decrease of 5.05 pts. The new CMC module in Shaoxing was upgraded in 23Q4 and costs increased due to the increase in the number of Chinese and British personnel. Q1 CDMO's new orders increased 40% + year over year, and downstream demand showed a positive recovery trend.
The clinical research business is progressing steadily, and the macromolecules and CGT sectors are under pressure in the short term. The clinical research business's revenue in Q1 2024 was 392 million yuan, up 4.60% year on year. Overseas clinical and domestic SMO services drove a steady increase in revenue; gross margin for the first quarter was 9.32%, a year-on-year decrease of 4.70 pts. Increased competition in the domestic clinical CRO industry led to a decline in gross margin, and there was some pressure on the order price side. Macromolecule and CGT Services Q1 revenue in 2024 was 91 million yuan, down 4.15% year on year. Among them, gene therapy CDMO continued to grow and revenue from testing services declined; the sector is still in the early stages of investment, with a gross margin of -38.6%. The Ningbo macromolecule drug discovery and production platform is expected to be put into operation one after another in 2024, and the company will begin to undertake macromolecule GMP production service projects.
Increased customer demand sends a positive signal of recovery, keeping the growth guide unchanged throughout the year. Judging from the current policy environment, the state's support for the innovative drug industry is very clear, and various provinces and cities are also introducing specific support policies for the innovative drug industry. In 2024, Q1's global customer inquiries and visits picked up compared to the same period last year. The amount of new orders increased by more than 20% year over year, and there is a clear positive sign of market recovery. The company maintains its goal of 10% + revenue growth in 2024, and is repurchasing shares based on confidence in future development and maintaining the company's value. The total repurchase amount is not less than 200 million yuan and no more than 300 million yuan of A-shares and all of them are cancelled.
Investment advice: Kanglong Chemical will build a full-process, integrated and international CXO service platform. Enriching the project pipeline will drive continuous business growth. We expect the company to achieve operating income of 127.05/146.13/16.77 billion yuan in 2024-2026, up 10.1%/15.0%/14.8% year-on-year respectively, and net profit to mother of 16.54/19.77/2,324 billion yuan, corresponding PE 21/17/15 times, maintaining the “recommended” rating.
Risk warning: risk of declining demand, risk of policy change, risk of increased competition, risk of overseas regulation, exchange rate risk, etc.