The company's business structure continues to be optimized, and the profit side is under short-term pressure due to inventory impairment. Established in 1987, Nanjing Jianyou Biochemical Pharmaceutical Co., Ltd. has the world's leading production technology for high-end sterile injections, and is also one of the leading companies in the production of heparin APIs in China. The company's early business centered on heparin APIs. In 2017-2022, along with the continuous development of the company's low molecular weight heparin formulation and sterile injection business, the company's overall revenue and profit showed a relatively rapid growth trend, with CAGR of 27% and 28% respectively. In 2023, short-term performance was pressured by multiple factors such as inventory impairment, collection of low molecular weight heparin preparations, and exchange rate fluctuations due to fluctuations in the price of heparin APIs. The company lost 189 million yuan in net profit to mother, a decrease of 117% over the previous year. Affected by the high price base for heparin APIs in 2023Q1, 2024Q1's revenue was 1.04 billion yuan, a year-on-year decrease of 23%, and net profit to mother was 177 million yuan, a decrease of 47% year-on-year. The company's revenue and profit side is expected to resume rapid growth in 2024 along with the gradual improvement in the marginal price of heparin APIs, and the acceleration of the overseas injection business.

The short-term disturbance of heparin APIs has abated, and a new price cycle is expected to begin. China is a major exporter of heparin APIs, and Jianyou Co., Ltd. ranks in the top 3 in the global market share of heparin APIs. According to data from the General Administration of Customs, as of April 2024, the price of heparin has quickly fallen back to 4,755 US dollars/kg, which is basically the same as the price level of heparin in 2018. The downstream storage cycle has basically ended, and the upstream and downstream supply and demand relationships continue to improve. We expect the second half of 2024 to begin a new heparin price upward cycle. According to the company's announcement, the company's heparin inventory structure continued to be optimized, and raw material inventories were gradually reduced, and in 2023, 517 million yuan was prepared for impairment of raw materials and 730 million yuan for depreciated products, totaling 1,247 million yuan. The total book value of raw materials and inventory products after impairment was 3,665 billion yuan, or about 75% of its book balance before depreciation. Along with the increase in downstream demand for heparin, it is expected to drive the continued recovery of heparin prices. We expect that the risk of heparin raw materials has been fully released after the current heparin inventory reduction.

Build a commercialization platform for high-quality overseas injections, and help the company grow in the long term by going overseas for biopharmaceuticals. According to our estimates, the US generic injection market will exceed 24 billion US dollars in 2022, and the competitive pattern is good. The continued shortage of injectable drugs in the US, compounded by the high GMP production requirements for injections, is expected to usher in development opportunities for high-end domestic injectables.

Jianyou Co., Ltd. continues to advance the development strategy of “based in China and the US, with a global perspective”. It acquired Chengdu Jianjin Pharmaceutical in 2016, began a strategic transformation into the high-end injectables field, acquired American pharmaceutical company Meitheal in 2019, and quickly built overseas direct sales channels. By the end of 2023, the company had more than 50 products in operation in the US market, and is one of the suppliers with the most complete injection sales pipeline in the US. According to the company's announcement, Meitheal's sales in 2023 were 1,630 billion yuan, up 38% year-on-year, with a significant growth rate. In terms of profitability, Jianyou Co., Ltd. has a clear cost advantage in raw materials and manufacturing. The gross margin level of the overseas formulation business is significantly higher than the average of the industry. In the future, as production capacity is built up one after another, product clusters continue to expand, and sales capacity is further refined, the profitability of the company's overseas formulation business is expected to continue to rise. In addition, the company actively lays out biopharmaceuticals and high-end complex formulations. In 2022, it cooperated with Hainan Shuangcheng to introduce high-potential albumin paclitaxel products and enter the US high-end complex formulation market. In 2023, the company cooperated with Tonghua Dongbao to develop a variety of third-generation insulins and enter the US biosimilar market. The company's continued expansion into the biopharmaceutical field is expected to open up the company's long-term growth ceiling.

Investment advice: Considering that short-term fluctuations in heparin API prices have abated, domestic formulation collection has basically cleared, and the overseas injection business continues to expand, we expect the company to achieve revenue of 43.44/53.22/6.624 billion yuan in 2024-2026, respectively, and net profit of 8.67/11.53 billion yuan, respectively. According to the relative valuation of the company's business, we gave the company 28.5 times PE in 2024, corresponding to a target price of 15.37 yuan. Considering the continued expansion of the company's overseas biopharmaceutical business, the company's value is expected to continue to increase. For the first time, it was covered and given a “recommended” rating.

Risk warning: 1) Impact of API price fluctuations: Heparin API prices fluctuates due to supply and demand relationships, affecting the company's profit level. 2) Overseas formulation release falls short of expectations: Whether each node progresses smoothly after the company's overseas formulation products are launched has a significant impact on the sales volume of the company's products. 3) Impact of national policies: Health insurance negotiation policies may be adjusted, thereby affecting the company's domestic formulation sales.