Incident: Prologis Pharmaceuticals released its 2024 interim report. In 2024 H1, the company achieved revenue of 6.429 billion yuan (YoY +7.96%), net profit attributable to mother of 0.625 billion yuan (YoY +3.96%), and net profit of 0.602 billion yuan (YoY +1.24%) after deducting non-attributable net profit of 0.602 billion yuan (YoY +1.24%). In Q2 2024, revenue of 3.231 billion yuan (YoY +12.61%), net profit attributable to mother was 0.381 billion yuan (YoY +5.35%), and net profit not attributable to mother was 0.363 billion yuan (+0.48% YoY).

Comment:

The gross margin improved month-on-month, and the cost ratio declined steadily. In terms of profit margin, 2024H1 achieved a comprehensive gross profit margin of 24.70% (YoY -1.90pp), a net profit margin of 9.72% (YoY -0.37pp), and a net profit margin of 9.37% (YoY -0.62pp); and 2024Q2 achieved a gross profit margin of 25.35% (+0.2pp, YoY +1.3pp). In terms of cost ratio, the cost ratio during 2024H1 was 12.18% (YoY -1.16pp), with sales/management/R&D/finance expense ratios of 4.36% (YoY -0.13pp)/3.65% (YoY -0.46pp)/4.90% (YoY -1.01pp)/-0.72% (YoY +0.44pp), respectively. Reduced exchange earnings boosted the financial expense ratio.

The API business is progressing steadily, and competitiveness has been further strengthened. 2024H1, the company's API intermediates business achieved revenue of 4.704 billion yuan (+11.89% year over year). The development of new API customers continued to advance, and 15 new customers were added in the first half of the year. In the first half of the year, the company approved 2 API product registrations (15003-A, 16001), and 20 new raw materials were submitted to domestic and foreign DMF (including 4 INDs), and the number of varieties continued to increase. In terms of production capacity, 1) 303 and 304 high-end API production workshops were completed and put into use in March; 2) In order to improve competitiveness, the strategic product 07101 was upgraded with new processes and new production capacity. The company expects to complete construction in December. At the same time, production costs will be further reduced. At the same time, the industrial chain extension will be implemented for 07110 to build a new AH22081 production line. The company is expected to complete the construction in August; 3) The company plans to complete the transformation in August; 4) It plans to build a peptide production line. Meet the production needs of peptide products.

Excluding the impact of special projects, revenue & gross profit are growing, and CDMO's business continues to transform and upgrade.

2024H1, the company's CDMO business achieved revenue of 1.028 billion yuan (-9.82% YoY). The company quoted 731 projects (up 51% year on year) and 876 projects in progress (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 company continues to promote business transformation and upgrading from “original API + registered intermediate” to “original API + registered intermediate + API+ formulation”. 2024H1 has a total of 103 API projects (49% increase over the previous year), 18 of which have entered the commercialization stage.

Accelerate the promotion of a “multi-variety” strategy, and the formulation business is growing rapidly. 2024H1, the company's formulation business achieved revenue of 0.68 billion yuan (+18.37% year-on-year). The company has more than 120 formulation varieties, 51 research projects, 9 verification projects, and 6 application projects. Among them, the company expects weight loss and sugar reduction projects to enter the clinical phase in the fourth quarter of this year; 2024H1, the company has 5 domestic formulations submitted registration applications (oseltamivir phosphate capsules, cefadinib suspension, levocarnitine injections, cefdinil capsules, amoxicillin, potassium clavulanate tablets), 1 type of formulation Submission FDA (bupropion hydrochloride extended-release tablets (II)), a continued rich formulation product line, is expected to bring more room for development to the company's formulation business.

Profit forecast: We expect the company's revenue for 2024-2026 to be 12.48/13.96/15.54 billion yuan, up 8.8%/11.9%/11.3% year on year; net profit to mother will be 1.23/1.47/1.71 billion yuan, respectively, up 16.9%/19.3%/16.0% year on year, corresponding to 2024-2026 PE 14.1/11.9/10.2 times.

Risk factors: macro-environmental risk, financial risk, industry risk, business risk, R&D failure risk, loss of core technical personnel, etc.