The company's three major business segments, domestic pharmaceuticals, and US pharmaceuticals, are trending positive. As the scale of manufacturing continues to expand, efficiency and scale effects will also be highlighted, which is expected to further strengthen the company's global competitiveness and drive a marginal increase in profitability. At present, the company's valuation is at a low level for nearly ten years, and the allocation ratio of public funds has also entered the bottom range. We believe that as a leading pharmaceutical manufacturing enterprise with global competitiveness, Huahai still has huge room for development in its core business, and the company has full potential to continue to generate good investment returns over a long period of time.

Domestic formulations: new varieties, new channels, new scale can be expected. As the impact of the collection of the two major varieties became clear, the company approved 15 new products in '23, reaching the highest number approved in previous years. The new varieties are expected to continue to contribute to the sector. Combined with the company's current number of formulation approvals of 60-70, we expect the number of domestic formulation approvals for the company to reach more than 100 in the future. At the same time, the company actively optimizes the sales team. On the one hand, it accelerates the retail business layout in the outside market and actively explores diversified new business models; on the other hand, the company is also continuously expanding its grass-roots market coverage and focusing on increasing its product market share. A new high in the domestic formulation business can be expected.

Featured APIs: With the release of new types of APIs with expired patents and the release of domestic and foreign formulations, it is expected that downstream customers will end their inventory, which will fully boost the company's operating efficiency. 1) As downstream customers' inventory removal comes to an end, demand for existing APIs begins to recover; 2) the patent cliff gradually approaches, and the new varieties laid out by the company gradually begin to be released to support the rapid development of the company's API business in the medium to long term; 3) The rapid release of domestic and American formulations will continuously increase the proportion of self-use and expand the scale advantage of the company's manufacturing.

Combining these factors, we expect the company's API business to continue to grow well for a long period of time to come.

Overseas formulations: It is expected to reach an inflection point. In 2023, the number of US ANDA (Abbreviated New Drug Applications) approved for the company reached 8. Since 2018, the company has maintained the pace of declaring several new ANDA varieties every year, and the newly declared varieties have continued to upgrade to high-tech barrier drugs such as special formulation technology drugs such as mitigation/controlled release, first/challenged patented drugs, and semi-solids. With the approval of the variety gradually contributing to revenue, the overseas formulation business can be expected to reverse losses.

Follow-up layout: Biopharmaceuticals, small-molecule innovative drugs, etc. are progressing in an orderly manner. In recent years, the company has also begun to steadily advance the layout of follow-up businesses such as biopharmaceuticals, biopharmaceuticals, and innovative small molecule drugs, with a view to opening up more room for future growth. At present, the company has more than 14 product pipelines under development in the field of biopharmaceuticals. Among them, HB0036 and HB0025 are all innovative drug types reported by China and the US. In terms of small molecule chemicals, in July 2023, the company transferred the rights of the thrombin inhibitor HHT-120 in Greater China with a total amount of 86 million yuan, achieving value transformation of the results of small molecule drug research and development for the first time.

Investment advice: We expect the company's net profit to be $1,211, 14.93, and $1,822 million respectively in 24-26, up 45.9%, 23.2%, and 22.1% year-on-year. Considering the company's clear and rapid growth prospects and the company's leading edge in the advanced pharmaceutical manufacturing sector, we believe that a certain valuation premium should be appropriately given, 30 times PE over 24 years, and the corresponding target price is 24.5 yuan. Covered for the first time, giving it a “strong” rating.

Risk warning: 1. The recovery of the company's US formulation business fell short of expectations; 2. The approval of the company's domestic formulations fell short of expectations; 3. Competition in the domestic formulation business intensified; 4. The release volume of new APIs did not meet expectations; 5. Competition in the API industry intensified.