Core views

In the first half of 2024, the company's performance achieved steady growth. Among them, sales of the 24Q2 main product, Diploid Mad Seedling, increased significantly, which led to an increase in performance. The company continues to promote terminal sales of human diploid vaccine. Net terminal sales continued to grow year on year, and the growth trend is expected to continue in the second half of the year. The company's Noro Vaccine Overseas Agreement already brought in a down payment of 15 million dollars in the first half of the year, and is expected to contribute some milestone payments in the second half of the year to help increase performance.

The company introduced an employee stock ownership plan, which highlights the company's confidence in long-term development and is conducive to the company's sustainable, healthy and efficient development.

occurrences

The company released its 2024 semi-annual report, and the results were in line with expectations

On August 16, the company released its 2024 semi-annual report, which achieved: 1) operating income of 0.741 billion yuan, up 16.81% year on year; 2) net profit of 0.307 billion yuan, up 23.51% year on year; 3) net profit without return to mother 0.309 billion yuan, up 32.26% year on year; 4) basic earnings per share of 2.30 yuan. The performance was in line with expectations.

The company issued the “2024 Employee Stock Ownership Plan (Draft)”

On August 16, the company issued the “2024 Employee Stock Ownership Plan (Draft)”.

Brief review

Sales of Diploid Vaccine 24Q2 increased significantly. Noru Vaccine's overseas sales showed its R&D strength. In the second quarter of 2024, the company achieved operating income of 0.43 billion yuan, up 20.60% year on year; net profit to mother was 0.157 billion yuan, up 9.84% year on year; net profit after deducting non-return mother was 0.16 billion yuan, up 14.90% year on year. 24Q2's revenue increased significantly, mainly due to increased sales of Diploid Mania, which led to increased performance growth. Net profit to mother grew slower than on the revenue side, mainly due to the year-on-year increase in credit impairment losses and fair value change losses. Excluding overseas licensing revenue from 24H1's recombinant hexavalent norovirus vaccine, the company sold about 0.635 billion yuan of diploid vaccine, an increase of 0.4% over the previous year, and remained stable.

In the first half of the year, 1.043 million tablets were issued in batches, continuing to promote terminal sales. In the first half of 2024, the company's core product, freeze-dried human rabies vaccine (human diploid cells), achieved batch issuance volume of 1.043 million, a year-on-year decrease of 60.44%, mainly due to the impact of production plans and batch issuance cycles. On the sales side, the company continues to promote terminal sales of diploid fanatics, optimize the refined sales management system, enhance the professional sales capabilities of marketers and academic promoters, and achieve continuous expansion of channel coverage. The company strengthens professional academic promotion efforts, continuously increases market coverage, and promotes channel decline and terminal construction. Net sales of the company's Diploid Mad Seedling terminals increased significantly year-on-year in the first half of the year, and channel inventory levels were further optimized.

Continuing to advance the research pipeline, Noro Vaccine went overseas to demonstrate its research and development capabilities. The company continues to promote research and development of products and technologies under development, and key R&D projects are progressing steadily. In January 2024, the company signed an “Exclusive License Agreement” with HillEvax. The company authorized HillEvax to develop, manufacture and commercialize the recombinant hexavalent norovirus vaccine and its derivatives in regions other than China (including Hong Kong, Macao and Taiwan). The transaction amount includes a down payment of 15 million US dollars, development milestones and sales milestones of up to 0.2555 billion US dollars, and royalties as a single-digit percentage of actual annual net sales. In March 2024, the company received a down payment of 15 million dollars and will continue to advance the implementation of the license agreement in the future. The signing of an agreement with HillEvax not only helps advance the overseas research and development process for the recombinant six-valent norovirus vaccine, but also marks positive progress in the company's vaccine pipeline going overseas. It is a positive result of the company's increased R&D efforts in recent years, fully demonstrating the company's innovative vaccine research and development capabilities.

Release employee stock ownership plans, clear performance assessment goals

Key points of the current employee stock ownership plan (draft): 1) Participants: company directors (excluding independent directors), senior management, supervisors, middle management and core executives; the total number of employees is not more than 66, including 7 company directors (excluding independent directors), senior management, and supervisors.

2) Method and quantity of shares acquired: It is proposed to use 3 million shares that have already been repurchased, accounting for 2.23% of the company's total share capital. Among them, 2.59 million shares will be granted for the first time, and 0.41 million shares will be reserved. 3) Transfer price: 30.00 yuan/share. 4) Duration: 36 months. 5) Expense amortization situation: According to the closing price calculation of the trading day before the draft was published, it should be confirmed that the total fee for the initial grant is estimated to be 62.3413 million yuan, and 1168.90/3896.33/ 11.689 million yuan will need to be amortized separately in 2024-2026. This incentive plan is conducive to maximizing the value of the company and shareholders, enhancing the company's attractiveness and cohesion, and promoting the company's sustainable, healthy and efficient development.

The performance assessment goals are clear, demonstrating the company's confidence in long-term development. The company's current shareholding plan was granted for the first time to partially assess the 2024-2025 fiscal year. Based on the 2023 results, the growth rate of revenue or net profit deducted for each assessment year compared to 2023 was assessed. The performance assessment goals are: 1) the company's annual revenue from 2024 to 2025 increased by 20% and 30%, respectively, compared to 2023 (20% and 8.3% year-on-year increase, respectively); 2) the company's annual non-net profit deducted from 2024 to 2025 (excluding the impact of share payments) increased 20% and 30%, respectively, compared to 2023 (20% and 8.3% year-on-year increase, respectively). Revenue and net profit not attributable to mother were selected as assessment indicators for this incentive plan assessment. Among them, net profit is the ultimate reflection of the company's growth. Operating income can reflect the company's main operating results. The indicators are set reasonably, scientifically, and highly challenging, demonstrating the company's confidence in long-term development.

R&D expenses declined significantly year-on-year, and sales growth drove an improvement in net operating cash flow in the first half of 2024. The company's gross profit was 0.701 billion yuan (+18.09%), and the gross profit margin was 94.54% (+1.02pct), a slight increase over the same period last year.

The company's sales expenses for 2024H1 were 0.207 billion yuan (+18.24%), sales expense ratio 27.94% (+0.34pct); management expenses 0.054 billion yuan (+33.72%), management expense ratio 7.30% (+0.92pct); R&D expenses 0.065 billion yuan (-39.02%), R&D expenses rate 8.71% (-7.97pp); financial expenses - 0.006 billion yuan (-59.14%), financial expenses Rate -0.81% (-0.22pp) The company's R&D expenses have declined sharply, mainly due to a decrease in phased investment in R&D projects; the increase in the management expense ratio is mainly due to the increase in the company's labor costs and the increase in depreciation and amortization of office assets. The net operating cash flow of 2024H1 was 0.176 billion yuan, up 44.37% year on year, mainly due to the increase in the company's operating income; profit and loss from changes in fair value - 0.005 billion yuan, and 23H1 was 0.015 billion yuan, mainly due to changes in fair value of participating companies.

Outlook for the second half of 2024: Sales of diploid mad seedlings continue to advance, and it is expected that the milestone payment company will continue to promote human diploid terminal sales in the first half of 2024. Market coverage has increased, channel decline and terminal construction have made significant progress, and net terminal sales have continued to grow year on year. It is expected that in the second half of the year, as the company's sales work continues to progress, human diploid fanaticism is expected to continue to grow, driving performance improvement. The company's agreement to restructure the hexavalent norovaccine overseas brought the company a down payment of 15 million US dollars in the first half of the year, and it is expected that it will continue to contribute some milestone payments in the second half of the year, helping to further increase performance. The company introduced an employee stock ownership plan and set clear performance assessment goals, demonstrating the company's confidence in long-term development, which is conducive to the company's sustainable, healthy and efficient development.

Profit Forecasts and Investment Ratings

We expect the company to achieve operating income of 1.947 billion yuan, 2.115 billion yuan, and 2,366 billion yuan respectively, up 23.4%, 8.6%, and 11.9% year-on-year respectively; in 2024, we expect to receive about 20 million US dollars (total RMB 0.144 billion) from HilleVax for the Noro vaccine, and the estimated net profit for 2024 to 2026 is 0.692, respectively billion yuan, 0.743 billion yuan, and 883 million yuan, increased 35.9%, 7.4%, and 16.1%, respectively. The equivalent EPS was 5.14 yuan, 5.52 yuan, and 6.41 yuan respectively, and the corresponding PE was 10.5X, 9.8X, and 8.4X, respectively, maintaining the purchase rating.

Risk analysis

1. Product sales fall short of expectations: The company's main source of revenue is freeze-dried human rabies vaccine (human diploid cells). If many vaccine manufacturers successfully develop human diploid cell rabies vaccines and achieve marketing, it may adversely affect the market share and sales price of the company's products.

2. Risk of product price fluctuations: Prices of listed products may fluctuate. If the price drops significantly, it will affect the company's revenue and profit expectations, which in turn affects valuation.

3. Product safety risks: Vaccines have certain safety risks due to their special biological characteristics. If a vaccine safety incident occurs, it will not only adversely affect the operation and production of the enterprise itself, but may also cause fluctuations in the vaccine industry.

4. Product development falls short of expectations: Vaccine products have the characteristics of long R&D cycle, high technical difficulty, and high R&D risk. At the same time, considering changes in external environmental factors, there are certain uncertainties about whether vaccine product R&D results can successfully achieve large-scale production and sales.

5. Risks related to management: The company received a notice from the actual controller and chairman Mr. Wang Zhentao on March 15, 2024. It received a “Notice of Case Filing” issued by the China Securities Regulatory Commission and decided to file a case against it due to suspected illegal disclosure of information. On April 29, the company received a notice from Mr. Wang Zhentao. Mr. Wang Zhentao, Aokang Co., Ltd. and related personnel received an “Advance Notice of Administrative Penalties” issued by the Zhejiang Regulatory Bureau of the China Securities Regulatory Commission on April 28 due to suspected illegal information disclosure violations. On May 16, Kanghua Biotech received a notice from the actual controller and chairman, Mr. Wang Zhentao. It received the “Administrative Penalty Decision” ([2024] No. 17) issued by the Zhejiang Securities Regulatory Bureau on May 16, 2024, and decided to give Wang Zhentao a warning and fine of 3 million yuan. Among them, the supervisors directly responsible were fined 1 million yuan, and 2 million yuan was imposed as the actual controller. The investigation matters and proposed administrative penalty decisions are directed against Mr. Wang Zhentao personally. The matters being investigated have nothing to do with the company and have no direct impact on the company's normal business activities and financial situation, but they still need to be further processed in the future.