Description of the event

The company released its 2024 mid-year report. In the first half of 2024, the company achieved operating income of 0.525 billion yuan, an increase of 23.88% year on year; net profit to mother of 0.134 billion yuan, up 12.35% year on year; net profit after deducting non-return to mother of 0.123 billion yuan, an increase of 3.13% year on year.

Incident comments

Profits are affected by increased depreciation and amortization, increased R&D investment, and reduced equity sharing revenue. The company achieved a comprehensive gross profit margin of 68.75% in the first half of the year, a year-on-year increase of 2.2 pcts, a year-on-year net profit margin of 25.56%, and a year-on-year decrease of 2.6 pcts. 1) Among them, R&D expenses for the first half of the year were 0.149 billion yuan (+61.94%); 2) 2024H1 added depreciation of 67.6927 million yuan, compared to 34.5393 million yuan in the same period last year; 3) 2024H1 equity share revenue of 4.5541 million yuan, significantly lower than 16.6185 million yuan in the same period last year. Since equity sharing became a zero-current cost business, the year-on-year impact on profit was greater. By the end of the first half of the year, the company had 89 R&D projects with sales equity shares, of which 19 were approved. It is expected that the newly approved products will contribute more equity share revenue after sales volume.

The transformation of independent R&D technology achievements continues to increase rapidly, and there have been fluctuations in commissioned R&D services. The transformation of 2024H1 R&D technology results achieved revenue of 0.29 billion yuan (+52.4%), pre-clinical pharmacy research achieved revenue of 0.113 billion yuan (-9.1%), and the clinical service sector achieved revenue of 92.59 million yuan (+32.2%). In terms of independent R&D projects, by the end of 24H1, the company had set up nearly 300 independent R&D projects that had not yet been converted, completed 196 projects in the small test phase, completed 40 projects in the pilot expansion phase, and 30 projects in the verification production phase. Research and development results were transformed into 36 technologies during the reporting period. The indications covered various diseases such as respiratory, digestive, infection, tumors, neuropsychiatric, and cardiovascular diseases.

CDMO strengthens external services, and the “Pharmaceutical+Clinical+Customized R&D and Production” integrated service continues to advance. The company has built a customized R&D and production service platform dedicated to providing customers with integrated services for “pharmaceutical research+clinical trials+customized R&D and production” comprehensive drug development and production. As of June 30, 2024, the subsidiary Thermo Pharmaceuticals has completed implementation verification of more than 520 projects and registered 303 projects, ranking among the highest in the country. Thermo Pharmaceuticals has undergone a total of 11 registration checks by the State Administration, 20 varieties have passed drug registration checks, 11 GMP compliance checks for drugs in Zhejiang Province, and 22 production lines have passed GMP compliance checks. 2024H1 Thermo Pharmaceuticals obtained a total revenue of 62.0208 million yuan from internal and external customized R&D and production services. Of these, receiving customized R&D and production service orders from external customers achieved operating income of 5.1205 million yuan, achieving a gross profit margin of 56.43%.

We expect the company to achieve net profit of 0.3/0.361/0.425 billion yuan in 2024-2026, corresponding to the current stock price valuation of 14/12/10 times, giving it a “buy” rating.

Risk warning

1. The R&D outsourcing needs of companies investing in novel drug R&D fall short of expectations; 2. The company's self-developed variety progress falls short of expectations.