Three-wheel drive, innovation is on the right track. The company started with infusion and built a “product” operating structure for Colon Pharmaceuticals, Colon Pharmaceuticals, and Twining Biotech through deep integration of industrial capital. In 2023, the company achieved revenue of 21.45 billion yuan (+12.7%), net profit of 2.46 billion yuan (+44.0%), steady performance and improved profitability: on the one hand, the structure of infusion products continued to be optimized; on the other hand, the volume and price of antibiotic intermediates rose sharply, and new generic drug products were approved and collected and released, becoming a new profit growth point for the company. More importantly, the subsidiary Colunbott has realized the development of a number of innovative drugs, and commercialization is dawning.

The ADC platform is leading in China, and the product is about to enter the harvest period. First, the two ADC pipelines will enter the commercialization stage: SKB264 is the first domestically produced TROP-2 ADC. It has great potential for breast cancer, lung cancer, etc., and the overseas commercialization process is going well. As of May '24, MSD has initiated 9 global phase III clinical trials, with great potential for using K drugs; the A166 is the first domestic HER2 ADC for breast cancer, and is about to be launched. Second, non-ADC pipelines are well-stocked. PD-L1 and cetuximab analogues in the oncology field are expected to be approved for marketing within the year or early next year, and RET inhibitors are expected to be submitted for NDA within the year; the market space for indications covering non-oncology fields is broad, including rheumatoid arthritis, alopecia areata, asthma, thromboembolic diseases, etc.

New synthetic biology products are on the market, and generic drugs benefit from collection and release. Twining Biotech has achieved an integrated layout of synthetic biology from R&D to production. It has delivered products such as bisabolol, 5-hydroxytryptophan, and ergothione. The equity incentive assessment target covers the formal production and revenue generation of 2-3 new synthetic biology products every year from 2024-2025. At the same time, domestic production capacity for antibiotic intermediates is leading. As market demand recovers and cost reduction and efficiency advance, profitability ushered in an upward inflection point. In terms of generic drugs, the company has outstanding ability to copy the first copy. The new product echelon is complete, the impact of product collection with large stocks has been digested, and the new products are collected to achieve volume release.

A domestic infusion leader, an original stand-up pouch to provide sufficient cash flow. The leading position for domestic infusion is stable. The company's independent research and development of “stand-up pouches” is leading the development direction of infusion packaging and increasing the share of sealed infusion sales. At the same time, advantageous areas such as parenteral nutrition continue to be strengthened, and endogenous cash flow in the infusion sector is sufficient.

We forecast that the company's 2024-2026 earnings per share will be 1.88, 2.11, and 2.36 yuan, respectively. Based on comparable company valuation levels, we believe that the company's reasonable valuation level in 2024 is 21 times the price-earnings ratio, and the corresponding target price is 39.48 yuan, giving it a “buy” rating for the first time.

Risk warning

The risk that generic drug types will enter collection or that the collection exceeds expectations, the risk that product competition will increase or sales will fall short of expectations, the risk that the progress of innovative drug research and development will fall short of expectations, the risk of price fluctuations in the antibiotic intermediate market, etc.