Key points of investment

The performance is steady, and orders continue to grow. The company released its 2024 semi-annual report: during the reporting period, the company's revenue was 0.525 billion yuan (YoY +23.88%), and net profit to mother was 0.134 billion yuan (YoY +12.35%). In the first half of the year, the company's new order amount (tax included) was 0.711 billion yuan, an increase of 13.38% over the previous year. Looking at the Q2 single quarter, the company achieved revenue of 0.309 billion yuan (YoY +17.65%) and net profit to mother of 0.084 billion yuan (YoY +0.00%). We believe that the slowdown in the company's performance growth rate is mainly affected by fierce competition in the industry and the lower volume of products sold by downstream customers than expected.

Gross margin reached a new high in recent years, and R&D investment continued to increase. 2024H1, the company's gross margin was 68.75% (+2.19pct), and the net margin was 25.56% (-2.62pct); the gross margin hit a new high since 2016, mainly due to the rapid increase in the volume of high-margin technological achievements transformation business. In terms of the cost rate for the period, the company's R&D expenses rate was 28.32%, an increase of 6.66 pcts over the same period last year, mainly due to the company's continuous increase in investment in research and development of innovative drugs and generic drugs. During the reporting period, the company continued to expand its R&D team to 1,271 people, an increase of 25.59% over the previous year. In the same period, the company's sales, management, and financial expense ratios were 1.31%, 11.76%, and -0.29%, respectively, changing 0.30, -2.70, and 2.80pct from last year; the increase in sales expenses was mainly due to increased promotion and participation; the increase in financial expenses was mainly due to capital consumption and increased borrowing.

Competition in the front-end business intensifies short-term pressure, and the clinical business benefits from the rapid growth of high-end projects. With 2024H1, the company's preclinical business revenue was 0.113 billion yuan (YoY -9.09%), and gross margin was 57.78% (-0.43pct); the pressure on the pre-clinical business is expected to be mainly affected by the decline in the price of the four drug-related projects due to increased competition in the industry. In the same period, the company's clinical business achieved revenue of 0.093 billion yuan (YoY +32.22%) and gross margin of 37.78% (-1.84pct); the continued rapid growth of clinical business is expected to be mainly due to the increase in the number of R&D projects for Class II and Class III drugs driving increased clinical demand from customers. We believe that despite increased competition in the industry, the company is still expected to take on more R&D projects for Class II and III drugs with technical and experiential advantages, and the overall trustee business is expected to maintain steady growth as R&D progresses.

Due to customer product volume falling short of expectations, the short-term growth rate of CDMO and equity sharing business slowed. 2024H1, the subsidiary Thermo Pharmaceuticals, obtained a total CDMO revenue of 0.062 billion yuan (YoY +3.21%), of which it undertook CDMO order revenue of 5.1205 million yuan from external customers, achieving a gross profit margin of 56.43%; it has completed implementation verification of more than 520 projects, and registered 303 projects. In the same period, the company's equity share revenue was 4.5541 million yuan, and it had 89 equity sharing projects, of which 19 were approved. Currently, Thermo's equity and equity sharing business is under pressure, which is mainly due to customer product sales falling short of expectations. The company's project reserves are sufficient, and Symer Pharmaceuticals has accelerated the progress of the company's commissioned and self-developed projects. The production line covers 24 dosage forms, and production capacity is abundant; with the gradual recovery of customer drug production and sales, the company's overall performance is expected to return to a rapid growth trend.

Investment advice: With the gradual recovery of customer drug production and sales, Symer Pharmaceuticals and equity sharing revenue is expected to return to a rapid growth trajectory. At the same time, the company has sufficient reserves for research projects, accelerates the research and development process of innovative drugs and difficult to generic drugs, and continues to transform and upgrade its business structure, laying the foundation for long-term growth and performance flexibility. We expect the company's net profit to be 3.76, 5.08, and 6.68 billion yuan (original forecast: 3.76, 5.08, 6.71) respectively, and EPS of 3.45, 4.66, and 6.13 (original forecast: 3.45, 4.66, 6.16) respectively, corresponding to PE 10.7, 7.9, and 6.0 times, respectively. Maintain a “buy” rating.

Risk warning: Policy risks such as the risk that the order project is progressing less than expected, the risk of industry competition increasing the risk, and the failure to advance collection as expected.