2023&2024Q1 results fell short of our expectations

2023 results: Revenue of 3,667 billion yuan, revenue up about 10% year on year after excluding major orders; net profit of 267 million yuan, -86.69% year over year; first quarter results of 2024: revenue of 678 million yuan, year-on-year, and net loss of 95 million yuan; lower than our expectations, mainly due to intense market competition, a decline in capacity utilization after major order production was completed, and new capacity investment.

Development trends

CDMO, a small molecule API, continues to consolidate the project pipeline. In 2023, the small molecule API CDMO business revenue was 3.479 billion yuan, down about 50% year on year; looking at the project pipeline, in 2023, the total number of customer inquiries received exceeded 1,770, an increase of about 36% year on year, and front-end customer demand continued to grow; the company delivered 590 projects, an increase of about 31% year on year. Of these, 67 projects were in clinical phase III, 13 projects were in the new drug marketing application stage, and 141 projects were in the marketing stage; the company introduced 245 new orders (excluding J-STAR). The year-on-year increase was about 8%; the number of the company's service API products was 181, an increase of 54 over the previous year, the delivery of 17 PV projects was completed, and 16 PV projects are being implemented.

In the first year of operation of pharmaceutical production capacity, the small molecule formulation CDMO grew rapidly. In 2023, the formulation business achieved revenue of 124 million yuan, an increase of about 291% over the previous year; it provided services to 112 customers for 153 formulation projects, introduced 56 new customers, 82 new projects, and signed new orders of about 225 million yuan, an increase of about 89% over the previous year. In the fourth quarter of 2022, the first phase of the company's first pharmaceutical factory project in Chongqing's Liangjiang New Area was completed and put into operation. Currently, the company has five flexible and modular production lines for oral solid preparations, injections, and high-activity, etc., and the timely delivery rate of all five production lines has reached 100%; at the same time, the formulation has passed many official and customer audits, all of which have been approved at once, effectively guaranteeing business development.

Macromolecular CDMO achieved a breakthrough from 0 to 1. In 2023, the company provided services in 14 projects for 10 customers in new businesses such as peptides and oligonucleotides. The company's peptide service platform has solid/liquid phase synthesis, chromatographic separation, membrane concentration/purification, freeze-drying, etc., and can provide global peptide drug researchers with R&D services including chain/cyclic chemical synthesis of peptides, peptide modifications, and peptide conjugates (PDC). With the original small molecule API team's experience in the development and production of highly active compounds and professional synthetic macromolecule service capabilities, the company can provide one-stop customized pharmaceutical solutions in the linker-payload chemical chain for various conjugated drugs.

Profit forecasting and valuation

Due to increased competition in the industry and the phased utilization rate of production capacity, we lowered our 2024/2025 net profit by 46.5%/47.2% to 170 million yuan/212 million yuan. The current stock price corresponds to 43.7 times the price-earnings ratio in 2025. Maintaining an outperforming industry rating, but due to recent systemic adjustments in the pharmaceutical sector, we only lowered our target price by 15.4% to 20.30 yuan, corresponding to 52.2 times the 2025 price-earnings ratio, which has 19.6% upside compared to the current stock price.

risks

Exchange rate fluctuations, declining demand, fixed asset investment, environmental safety, new business development, policy fluctuations.