Event: On August 14, 2024, Baicheng Pharmaceutical released its 2024 interim report results. The company achieved revenue of 0.525 billion yuan in the first half of the year, up 23.88% year on year, and net profit to mother of 0.134 billion yuan, up 12.35% year on year, after deducting non-net profit of 0.123 billion yuan, up 3.13% year on year. Looking at a single quarter, Q2 achieved revenue of 0.309 billion yuan, a year-on-year increase of 17.65%, and net profit to mother of 0.084 billion yuan, which remained flat year-on-year, after deducting non-net profit of 0.074 billion yuan, a year-on-year decrease of 12.28%.

The autonomous transformation business continues to grow rapidly, and innovative drugs and difficult generic drug development services are being deployed. The 2024H1 R&D technology achievement conversion revenue was 0.29 billion yuan, up 52.43% year on year. The gross margin remained at a high level of 87.28%, and 36 projects were successfully converted in the first half of the year. 1) Generic medicine sector: As of the first half of 2024, the company has set up nearly 300 self-development projects that have not yet been converted, including 196 in the pilot phase, 40 in the pilot phase of expansion, and 30 in the verification production phase; 19 equity products have been approved. As downstream customer product sales gradually increase, it will bring a steady increase in profit share to the company. 2) New drug sector: There are 17 self-developed projects, including 11 small-molecule chemicals and 6 macromolecular biopharmaceuticals. Of these, the Class 1 drug BIOS-0618 has entered the clinical phase II phase; it has also obtained IND approvals for 4 Class 2 new drugs. In June 2024, the company and Beijing Yuanfang Tongda reached a cooperation on the Class 2 improved new drug 202HY052. The company transferred 70% of the property rights to Beijing Yuanfang Tongda at 70 million yuan, and continues to be responsible for all related work such as R&D, clinical and production of this product. The new drug pipeline contains great transfer value. As the subsequent product echelons successfully transfer one after another, it will open up a new growth curve for the company's long-term development.

Commissioned R&D services have been under pressure for a short period of time, and new orders have remained steady. In the company's contract service business in the first half of 2024, pharmaceutical research revenue was 0.113 billion yuan, down 9.09% year on year, gross margin was 57.78%, down 0.43 pts year on year, clinical service revenue was 0.093 billion yuan, up 32.22% year on year, gross margin was 37.38%, down 1.84 pts year on year. Competition in the domestic generic drug CRO industry has continued to intensify in recent years. The company has won more customer projects by adjusting the pace of signing new contracts and adopting an active pricing strategy, and is facing certain pressure on gross margin and cash flow in the short term. As contract payments gradually increase and equity types contribute more profit shares, the company's operating cash flow situation will continue to improve. In the first half of 2024, the company signed new orders of 0.711 billion yuan, an increase of 13.38% over the previous year. MAH customers are still a source of revenue contributor, accounting for 59.53% of revenue in the first half of the year. Thermo Pharmaceuticals earned 0.062 billion yuan in internal and external revenue in the first half of the year. In total, it has completed more than 520 projects for implementation and verification, and has prepared multi-dosage production lines to meet customer CDMO needs.

Investment advice: Baicheng Pharmaceutical is a leading domestic generic drug CRO, providing customers with integrated services such as generic drug development, consistency evaluation, and innovative drug development. We expect the company to achieve revenue of 1.176/1.384/1.623 billion yuan in 2024-2026, a year-on-year increase of 15.6%/17.6%/17.3%, and net profit to mother of 0.3/0.362/0.439 billion yuan, corresponding PE of 14/12/10 times, maintaining the “recommended” rating.

Risk warning: customer repayment risk, demand decline risk, policy change risk, industry competition risk, R&D failure risk, etc.