Incidents:

On August 14, the company released its 2024 semi-annual report. 2024H1 achieved operating income of 0.525 billion yuan, up 23.88% year on year, net profit to mother 0.134 billion yuan, up 12.35% year on year, and net profit after deducting 0.123 billion yuan, up 3.13% year on year. Looking at a single quarter, 2024Q2 achieved operating income of 0.309 billion yuan, a year-on-year increase of 17.65%, and net profit to mother of 0.084 billion yuan, which is basically the same as 2023Q2. Net profit after deducting non-return to mother was 0.075 billion yuan, a year-on-year decrease of 12.28%.

Comment:

Commissioned R&D is under pressure, and new orders are growing steadily. The 2024H1 preclinical pharmacy research business achieved revenue of 0.113 billion yuan, a year-on-year decrease of 9.09%, and gross margin of 57.78%, which is basically the same as the same period last year. The slowing growth rate is expected to be mainly related to increased competition in the generic drug CRO industry.

In addition, the company's new orders maintained a steady growth trend. The number of new 2024H1 orders was 0.711 billion yuan (tax included), an increase of 13.38% over the previous year.

Self-research transformation began to accelerate, and clinical business grew steadily. The company's self-research and transformation business began to accelerate. 2024H1 achieved revenue of 0.29 billion yuan, a year-on-year increase of 52.43%, and gross margin of 87.28%, an increase of 4.50 pcts over the same period last year. A total of 36 projects were converted in the first half of the year. The indications covered various diseases such as respiratory, digestion, infections, tumors, neuropsychiatry, and cardiovascular diseases. In addition, the clinical business achieved steady growth. 2024H1 achieved revenue of 0.093 billion yuan, a year-on-year increase of 32.22%, and gross margin of 37.38%, down 1.84 pct from the same period last year; the CDMO business achieved cumulative internal and external revenue of 0.062 billion yuan, including external revenue of 5.1205 million yuan, and gross margin of 56.43%.

Investment in R&D continues to increase, and the layout of innovative drugs is becoming more and more perfect. The company continues to increase its R&D investment. 2024H1 R&D investment was 0.149 billion yuan, an increase of 61.94% over the previous year. We expect the sharp increase in R&D investment mainly related to personnel remuneration and investment in innovative drugs. Currently, the company has 17 innovative drug research and development projects, including 11 small-molecule chemicals and 6 macromolecular biopharmaceuticals. There are 1,271 R&D personnel, accounting for 71.16%, of which 33.83% are master's degree students, and 94.02% are undergraduate and above.

Profit forecast and investment advice: We expect the company's revenue from 2024 to 2026 to be 1.188/1.425/1.751 billion yuan, up 16.73%/20.02%/22.86% year on year; net profit to mother is 0.319/0.386/0.485 billion yuan, up 17.21%/21.03%/25.69% year over year, corresponding to current PE of 13/11/8 times, giving a “gain” rating.

Risk warning: Generic drug CRO business growth is slowing or declining, new orders falling short of expectations, rising labor costs and brain loss, drug development failure, and industry regulatory policies.