2024H1 results are in line with our expectations

The company announced 2024H1 results: revenue of 6.43 billion yuan, +7.96% YoY; net profit to mother 0.62 billion yuan, +3.96% YoY; deducted non-net profit of 0.6 billion yuan, +1.24% YoY; in line with our expectations.

Development trends

APIs have consolidated their core competitiveness and are progressing steadily. 2024H1, API revenue was 4.7 billion yuan, +11.9% year over year, gross margin was 16.22%, -2.3 ppt year over year. We judge that the year-on-year decline in gross margin was mainly due to high price pressure on some varieties. 2024H1 added 15 new customers in the first half of the year, and several products have generated steady growth. 1) Product side: The company has 2 API product registrations approved (15003-A, 16001); 2) Production capacity side: 303 and 304 high-end API production workshops were completed and put into use in March. The company expects 07101 to complete the new process and new production capacity upgrade in December 2024. The construction of the AH22081 production line is expected to be completed in August.

At the same time, the company plans to build a peptide production line. The project is currently in the design phase.

The number of CDMO clients and projects continues to grow well. 2024H1, the company's CDMO revenue was 1.03 billion yuan, -9.82% year-on-year, 40.1% year-on-year, and maintained positive growth, excluding special project revenue and gross profit; 731 projects quoted by the company, +51% year over year; 876 ongoing projects, +44% year over year, including 317 commercialization projects, +28% year over year; 559 R&D projects, +54% year over year; 103 API projects, +49% year over year, of which 18 have entered the commercialization stage.

As of 2024H1, the company has signed confidentiality agreements with 512 domestic and foreign innovative drug companies. The Boston laboratory in the US was completed in May and gradually put into use; at the same time, the company's newly built biological fermentation extraction pilot plant has entered the final stage.

The advantages of integrated APIs and formulations continue to be deepened, and the “multi-variety” strategy is being promoted at an accelerated pace. 2024H1, the company's formulation revenue was 0.68 billion yuan, +18.37% year over year, gross profit margin 60.3%, compared to +9.9ppt. The gross margin increased markedly. We judge that it was mainly due to product structure upgrades. As of 2024H1, the company has more than 120 formulation varieties, 51 research projects, completed 9 verification projects, and 6 declared projects. Among them, the company expects 2024Q4 weight reduction and sugar reduction project to enter the clinical stage. 2024H1. The company has 5 domestic formulations submitted registration applications, and 1 formulation variety has been submitted to the FDA. In terms of production capacity, the company built a new production line for cephalosporin preparations, which completed trial production and process verification in June; it plans to build a comprehensive international high-end formulation workshop. Currently, the project is in the design stage.

Profit forecasting and valuation

As the gross margin of APIs and CDMO is still under pressure, we lowered our 2024/2025 net profit by 12.5%/12.8% to 1.141 billion yuan/1.392 billion yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 16.0x/13.1x. Considering recent systemic adjustments in the pharmaceutical sector, maintaining an outperforming industry rating and target price of 17.50 yuan, corresponding to 17.9 times the price-earnings ratio of 2024 and 14.7 times the price-earnings ratio of 2025, there is 12.4% upward space compared to the current stock price.

risks

Capacity utilization falls short of expectations, orders fall short of expectations, risk of exchange rate fluctuations, geopolitical risk.