Investment summary

Event Overview: On August 15, the company released its 2024 semi-annual report. 2024H1 achieved operating income of 6.429 billion yuan, up 7.96% year on year; net profit to mother 0.625 billion yuan, up 3.96% year on year; net profit after deducting non-return to mother of 0.602 billion yuan, up 1.24% year on year. On a quarterly basis, 2024Q2 achieved operating income of 3.231 billion yuan, up 12.61% year on year; net profit to mother was 0.381 billion yuan, up 5.35% year on year.

Incident reviews:

Breaking out of the trough, the API intermediates business continued to recover. 2024H1's API intermediates segment revenue was 4.704 billion yuan, up 11.89% year on year; gross profit margin was 16.22%, down 2.30 percentage points year on year, but it was basically flat from month to month, mainly due to higher API sales and gross profit after the liberalization of 2023H1 controls. The company's API has achieved large-scale production on an order-based basis. The monthly output of 12 products has reached a record high, and costs have been further reduced; the market share of strategic varieties has gradually increased, and sales of multiple products have reached record highs. In the first half of the year, the company approved 2 API product registrations, and 20 new varieties were submitted to domestic and international DMF. It is expected to increase 30-50 APIDMF within 3-5 years; new customer development also continues to advance, with 15 new customers added in the first half of the year.

The number of CDMO projects continues to grow, and we await the release of future results. 2024H1's CDMO segment revenue was 1.028 billion yuan, down 9.82% year on year, gross profit margin was 40.09%, down 4.68 percentage points year on year, but Q2 increased 5.8 percentage points month over month; mainly 2023H1 had special commercial order sales, and CDMO business sales and gross profit also maintained good growth after deducting related orders in the first half of the year. In the first half of the year, the company's CDMO quoted 731 projects, up 51% year on year; there were 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 total number of API projects was 103, an increase of 49% over the previous year; as of 2024H1, the company had signed confidentiality agreements with 512 domestic and foreign innovative drug companies, an increase of nearly 100 over the end of 2023. In recent years, the number of the company's CDMO projects and customers has maintained rapid growth, forming a good funnel-shaped state, which is the driving force for the continued growth of this business in the future.

The “multi-variety” strategy is progressing steadily, and the gross margin of the formulation business has increased significantly. The company's formulation business implements a multi-variety and multi-channel strategy. There are 51 2024H1 research projects, and more than 25 formulation projects are being developed every year. It is currently in the ANDA stage of rapid growth; weight loss and sugar reduction projects are expected to enter the clinical phase in Q4 this year. On the other hand, the company has also begun to develop formulation CDMO/CMO services with domestic and foreign customers, and is actively expanding the new formulation business growth point of localization of original research products. 2024H1, the company's pharmaceutical division's revenue was 0.68 billion yuan, up 18.37% year on year, and gross profit margin was 60.30%, up nearly 10 percentage points year on year.

Production capacity has been released one after another, and the net interest rate has increased compared to 2023. The 303 and 304 high-end API production workshops were completed and put into use in March; the Boston Laboratory in the US was completed in May; the construction of a new pilot biological fermentation and extraction workshop has entered the final stage; it is proposed to build an international comprehensive high-end formulation workshop to add multiple production lines for oral solid preparations, freeze-dried powder injections, and small-volume injections. In addition, the peptide production line that began construction this year is expected to have an initial design capacity of 0.012-0.02 million liters. In the future, it will mainly be used for projects such as human peptides and cosmetic peptides, and the production line design is also multifunctional. 2024H1, the company's sales expenses ratio decreased by 0.13 percentage points year on year, management expenses rate decreased by 0.45 percentage points year on year, and financial expenses ratio increased by 0.44 percentage points year on year. R&D expenses were 0.315 billion yuan, which is basically the same as the previous year; currently, the company is also increasing investment in R&D, especially on the formulation side, and it is expected that R&D expenses will continue to grow throughout the year.

2024H1, the company's net sales margin was 9.72%, down 0.37 percentage points from the previous year, but up 0.52 percentage points from 2023.

Investment advice

We expect the company to achieve net profit of 1.191/1.356/1.571 billion yuan in 2024-2026, a year-on-year increase of 12.84%/13.86%/15.88%. The closing price on August 20, 2024 corresponds to a PE of 15/13/11 times, maintaining a “buy” rating.

Risk warning

Raw material price fluctuation risk; exchange rate fluctuation risk; new product development and registration risk; market competition risk.