Incident: The company released its 2024 mid-year report, achieving operating income of 0.856 billion yuan, -19.04%; net profit to mother 0.183 billion yuan, +53.57% year over year; net profit after deducting non-return to mother 0.179 billion yuan, +60.64% year over year; net operating cash flow of 0.284 billion yuan, +164.65% year over year. EPS (basic) 0.15 yuan. The results are in line with market expectations.

The gross margin of Heparin API has clearly rebounded, leading to a high year-on-year increase in net profit. From 24Q1 to Q2, the company's revenue in a single quarter was 0.461/0.394 billion yuan, -24.19%/-12.05%; net profit to mother 0.104/0.079 billion yuan, +21.13%/+137.87% YoY; net profit without return to mother 0.102/0.077 billion yuan, +19.11%/+196.88% YoY. By business: 24H1, the company's API revenue is 0.269 billion yuan (YoY -41.34%). It is estimated that it was mainly affected by heparin API price fluctuations, with a gross profit margin of 33.70% (+20.30pp). It is estimated that the decline in raw material costs for heparin APIs led to a recovery in gross margin; formulation revenue was 0.584 billion yuan (-1.49% YoY), and the gross profit margin was 61.36% (YoY -1.99pp). 24H1's net profit achieved a high year-on-year increase, mainly due to: 1) the overall gross margin of 24H1 was +10.89pp year on year, driven by a sharp recovery in the gross margin of the heparin API business; 2) 24H1 sales expenses ratio was -2.16pp year on year.

The Qianmu project progressed smoothly, creating the long-term advantages of heparin raw materials. The Henan Qianmu project has progressed smoothly since construction in October 2023. It is scheduled to be put into operation by the end of 24, and is expected to contribute to performance in '25. After the Qianmu project is put into operation, the company will cooperate deeply with Muyuan to create advantages in the entire industry chain from pig breeding, slaughter, heparin crude products, heparin raw products, heparin raw materials and formulation products, and plans to rely on leading traceability high-quality pig small intestine resources to enter the supply chain of high-end international customers to provide sales growth for the company to develop the high-end heparin API market in the future.

The CDK9 inhibitor program is applying for a breakthrough therapy and is looking forward to the implementation of innovative transformation. As of the end of June 2024, QHRD107 (CDK9 kinase inhibitor, indicated for recurrent acute myeloid leukemia) was unanimously recognized by researchers for “positive clinical trial results and good safety” at the phase II clinical phase analysis meeting. The company strives to apply for breakthrough therapy after phase II, and is expected to make phased progress by the end of 24; QHRD106 (indicated for acute ischemic stroke) was unanimously recommended by the expert group to enter phase II clinical trials. In addition, QHRD110 has completed phase I clinical trials in Australia and clinical bridging tests are being conducted domestically; QHRD211 has completed phase I clinical trials and entered phase II clinical trials. The company's continuous promotion of innovative pharmaceutical products will continue to inject new momentum into long-term development. We look forward to the phased progress of the company's CDK9 inhibitors by the end of '24.

Profit forecasting, valuation and ratings: Considering that the company's competitive advantage in the heparin field is expected to continue to increase, and innovative drug development is expected to bring new growth space, we maintain our forecast net profit of 0.308/0.368/0.421 billion yuan from 2024 to 2026, an increase of 69.09%/19.62%/14.34% year-on-year. The current stock price corresponds to PE 24/20/17 times, respectively, maintaining a “buy” rating.

Risk warning: risk of heparin price cycle fluctuations; risk of innovative drug development falling short of expectations.