Key points of investment

The company's 2024H1 performance grew strongly. With 2024H1, the company achieved operating income of 6.429 billion yuan, up 7.96% year on year; net profit to mother of 0.625 billion yuan, up 3.96% year on year; net profit after deducting 0.602 billion yuan, up 1.24% year on year. Among them, Q2 achieved revenue of 3.231 billion yuan in a single quarter, up 12.61% year on year; net profit to mother was 0.381 billion yuan, up 5.35% year on year. The company's Q2 revenue and profit both reached record highs.

API growth has been steady, and sales of many products have reached record highs. The 2024H1 API intermediates segment's sales revenue was 4.704 billion yuan, up 11.89% year on year; gross profit was 0.763 billion yuan, down 1.99% year on year, gross margin was 16.22%, down 2.30pp year on year. The company continued to increase its market share of strategic varieties, and sales of several products reached record highs in the first half of the year. During the reporting period, 15 new customers were added, 2 API product registrations were approved (15003-A, 16001), and 20 new API varieties were submitted to domestic and foreign DMF (including 4 INDs). In terms of project construction, the 303 and 304 high-end API production workshops were put into use in March of this year; a new AH22081 production line is expected to be completed in August; it is proposed to build a peptide production line to meet the production needs of peptide products, which is currently in the design phase. The expansion and transformation of the strategic product AP091 is expected to be completed in August; the strategic product 07101 will be upgraded with new processes and new production capacity, and construction is expected to be completed in December. Looking ahead to the whole year, the market share of core antibiotic products is expected to rise steadily. New product launches, new production capacity, and new process improvements will contribute to performance flexibility, and the API business is expected to maintain steady growth.

The number of CDMO projects has increased dramatically, and specialized service capabilities continue to increase. In the first half of 2024, the CDMO business achieved revenue of 1.028 billion yuan, a year-on-year decrease of 9.82%; achieved gross profit of 0.412 billion yuan, a year-on-year decrease of 19.25%, gross profit margin of 40.09%, and a year-on-year decrease of 4.68pp. Excluding the impact of special project orders during the same period of the year, revenue and gross profit maintained positive growth in the first half of the year. During the reporting period, the company's CDMO quoted 731 projects, up 51% year on year; 876 ongoing projects, up 44% year on year, including 317 commercialization projects, up 28% year on year, and 559 R&D projects, up 54% year on year. The Boston laboratory in the US was completed and gradually put into use in May of this year, and the new biological fermentation extraction pilot plant has entered the final stage. With the continuous enhancement of the company's R&D, manufacturing and service capabilities, the project continues to grow rapidly, providing strong support for the future growth of the CDMO business.

The formulation sector is growing rapidly, and the variety is constantly increasing. In the first half of 2024, the formulation sector achieved revenue of 0.68 billion yuan, up 18.37% year on year; achieved gross profit of 0.41 billion yuan, up 41.67% year on year, gross margin of 60.30%, up 9.92 pp year on year.

The significant increase in formulation revenue and gross profit was mainly due to the continued release of major formulation varieties in the first half of the year, increased capacity utilization, and reasonable cost control. During the reporting period, the company submitted applications for registration of 5 formulations in China (oseltamivir phosphate capsules, cefdinidine suspension, levocarnitine injection, cefdinib capsules, amoxicillin clavulanate potassium tablets), and 1 formulation variety submitted to the FDA (bupropion hydrochloride sustained-release tablets (II)). Currently, there are 51 research projects, 9 verification projects, and 6 application projects, involving various fields such as anti-infective, cardiovascular, central nervous system, phlegm relief, and cholestasis. Weight loss and sugar reduction projects are expected to enter the clinical stage in the fourth quarter of this year. A continued rich formulation product line will bring the company more room for development.

Investment advice: We expect the company's revenue for 2024-2026 to be 12.679/14.317/16.014 billion yuan, respectively, net profit to mother of 1.18/1.466/1.747 billion yuan, corresponding EPS of 1.01/1.25/1.49 yuan, and corresponding PE 15.43/12.42/10.42 times, respectively. Maintain a “buy” rating.

Risk warning: risk of exchange rate fluctuations, risk of drug development falling short of expectations, risk of formulation sales falling short of expected risk, etc.