Starting with specialty raw materials/intermediates, Jiuzhou Pharmaceutical has achieved fruitful results in the CDMO business and has further developed growth in the formulation and formulation CDMO business by relying on years of technology accumulation and customer resource advantages.

Active Pharmaceutical CDMO: Based on CMB's “4C” (Capacity+ Capability←→Clients & Contracts) analysis framework for CDMO, we believe the company is strong in the CDMO field. In 2023, CDMO achieved revenue of 4.079 billion, accounting for 74%.

Form deep embedded cooperation with customers: 1) Customer breadth: The company's customers cover MNC and well-known domestic innovative pharmaceutical companies. 2) Customer depth: The acquisition of Novartis's Suzhou factory and entering the core supply chain for 4 major products including noxinol; escorting the listing of Beida Pharmaceuticals' Bemena to supply the API for Alice's vormetinib. The future release of these two innovative drugs will bring new growth to the company.

The number of projects grew rapidly, and the funnel-shaped project pipeline continued to transform to the back-end: the number of projects at all stages of the company continued to grow, and the number of 2024Q1 projects increased 10-15% year over year; among them, the number of commercial projects increased rapidly, reaching 32 by the end of 2023, and the funnel-shaped project pipeline continued to transform to the back end.

Advanced production capacity layout: The company increased production capacity through a combination of “self-building+mergers and acquisitions”, and currently has four R&D bases and five production bases. In emerging fields, the peptide GMP production line was put into operation in 2023Q1, and small nucleic acids achieved full coverage of production capacity from grams to 100 kilograms.

Continuous R&D investment to enhance long-term competitiveness: The company's R&D cost rate has been stable at around 5% for many years, mainly investment in the CDMO business (69% in 2023). At the same time, the company attaches importance to talent incentives and implemented equity incentives in 2017, 2020, 2021, and 2022, respectively.

Intermediates and APIs: layout of specialty APIs, process optimization to enhance cost advantages; revenue in 2023 was 1.261 billion yuan, accounting for 23%. The company has a wealth of intermediates and API products, and is in an advantageous position in the market for specialty APIs such as central nervous system and anti-infective drugs. At the same time, it has benefited from the application of new technology and the shortened development cycle of self-developed products, increasing its competitive cost advantage. The gross margin reached 33% and yoy+243bp in 2023.

Formulations and Formulations CDMO: Integrated Extension of API Formulations+Formulation Outsourcing Services. By acquiring Kangchuanji and Sandoz's pharmaceutical factories in Zhongshan, and at the same time building its own Siwei pharmaceutical factory, etc., the company has basically completed the layout of its own generic drug formulations, outsourced innovative drug formulations CDMO, and outsourced generic CRO.

Covered for the first time, giving an “increase in wealth” investment rating. We expect net profit to be 1.14, 1.29, and 1.46 billion yuan respectively in 2024-2026, with growth rates of 10%, 13%, and 13%, corresponding to PE 11, 10, and 9x, covering for the first time, and giving a “gain” rating.

Risk warning: Delisting or large-scale recalls of service products, policy changes, increased competition, exchange rate fluctuations, etc.