2024Q2's quarterly revenue & profit reached a record high. We are optimistic that the R&D and commercialization of weight loss drugs will bring high demand for simeglutide, tirpotide, and liraglutide APIs. With large orders and cooperation from new customers, the company's independent selection business and CDMO business are expected to continue to grow rapidly.

Financial performance: 2024H1 revenue and profit continued to grow at a high rate

2024H1 achieved revenue of 0.831 billion yuan, a year-on-year increase of 107.47%, net profit to mother of 0.227 billion yuan, an increase of 442.77% year-on-year, and net profit after deducting 0.229 billion yuan, an increase of 433.45% year-on-year.

Looking at a single quarter, 2024Q2 achieved revenue of 0.476 billion yuan, a year-on-year increase of 146.82%, net profit to mother of 0.161 billion yuan, an increase of 671.78% year-on-year, and net profit of 0.164 billion yuan after deducting non-backward net profit of 0.164 billion yuan, an increase of 735.89% year-on-year.

Growth capacity: Independent Choice & Customization Business is two-wheel drive. Looking at the “Time+Technology” leading edge split, 2024H1 achieved revenue of 0.545 billion yuan from self-selected products, an increase of 119.76% over the previous year; of these, APIs and intermediates achieved revenue of 0.377 billion yuan, and formulations achieved revenue of 0.168 billion yuan. Customized products and services achieved revenue of 0.286 billion yuan, an increase of 88.16% over the previous year. The self-selected business and customized business have both achieved rapid growth, and I am optimistic that the trend will continue.

Independent choice business: The company has sufficient production capacity preparation, abundant on-hand orders, and strong superposition technology & product competitiveness. We are optimistic that weight loss R&D and commercialization will bring high demand for simeglutide, liraglutide, and tiverpotide APIs, which is expected to support the continued rapid growth of the independent choice business. 1. Product registration: In February 2024, the company obtained FDA DMF for its tirpotide APIs; in addition, 24H1 cetrorelix acetate, epastat, agomelatine and other APIs were approved for marketing. 2. Order: The company's BD team accelerates global business expansion, ① European market, cooperates with a number of leading generic drug companies for oral use of simeglutide and tirpotide APIs; ② North American market, reaching cooperation on Liraglutide formulations in the US market and expanding the first innovative animal drug polypeptide CDMO project; ③ South American market, signing strategic cooperation agreements for simeglutide formulations, and reaching cooperation with leading generic drug companies; ④ Indian market, reaching cooperation with leading generic drug companies on the global marketing of liraglutide formulations Advancing multiple oligonucleotide CDMO services ; ⑤ In the domestic market, strategic cooperation was reached on GLP-1 innovative drug raw materials and formulations. 3. Customers: The company's peptide raw materials have been sold to overseas markets such as the United States, Europe, India, Canada, etc. The main customers include well-known domestic and foreign pharmaceutical companies such as Krka, Cipla, Apotex, Chemo, Teva, Dr.Reddy, and Pro-Pharma. 4. Adequate production capacity: According to the company's semi-annual report, “The new 601 peptide workshop was capped ahead of schedule. It is expected that installation and commissioning will be completed by the end of 2024 to achieve a peptide production capacity of 5 tons/year. The new 602 peptide workshop is expected to complete construction, installation and commissioning in the first half of 2025, and will release another 5 tons/year of peptide production capacity”.

C (D) MO business: According to the company's major contract announcement in May 2023, the procurement amount is expected to reach 5.76 million US dollars in 2024. According to the company's semi-annual report, delivery has already begun in the second quarter of this year, and it is expected that the pace of delivery will be greatly accelerated from the second half of the year. We are optimistic that the company's CDMO business will continue to expand with new customers and projects under the impetus of BD, and it is expected to maintain a relatively rapid growth rate.

Profitability: The share of high-margin self-selected businesses increased, driving an increase in profitability of 2024H1. The company's gross profit margin increased by 67.32%, an increase of 9.73 pcts over the previous year. We believe that the increase in gross margin is mainly due to an increase in the share of high-margin independent choice businesses (70.85% gross margin, 24H1 revenue accounts for 65.53%, 23 annual revenue accounts for 60.84%). The company's net sales margin was 27.87%, up 17.93pct year-on-year. Looking at the cost ratio, the sales expense ratio was 3.45%, down 4.50 pcts year on year, mainly due to the reduction in commissions and marketing expenses; the management expense ratio was 15.71%, down 6.64 pct year on year. We speculate that it was mainly due to a decrease in unit cost amortization due to the scale effect; the R&D expense ratio was 13.53%, an increase of 3.58 pcts year on year, mainly due to the increase in R&D personnel remuneration, share payments, and technical service expenses. We expect 24H2 to continue to grow rapidly with self-selected businesses. Gross margin is expected to rise steadily due to scale effects, and it is expected to maintain a high level of gross margin & net interest rate throughout the year.

Operating efficiency: optimistic that the annual fixed asset turnover ratio will reach a new high

In terms of cash flow, the net cash flow from 2024H1's operating activities increased by 14.85% year-on-year, and customer repayments increased. Looking at the turnover ratio, the company's fixed asset turnover, accounts receivable turnover, and inventory turnover ratio all increased in 2024H1 (fixed asset turnover: 24H1 was 0.66 times, 23H1 was 0.47 times; accounts receivable turnover 24H1 was 2.12 times, 23H1 was 1.82 times; inventory turnover 24H1 was 0.67 times, 23H1 was 0.52 times). We are optimistic about the sustainability of the “sharp rise in volume and price” driven by the company's peptides. With a further increase in capacity utilization, the annual fixed asset turnover ratio is expected to reach a new high.

Profit forecasting and valuation

Considering that the growth rate of the company's 24H1 independent selection business & customized business has exceeded our expectations, and the high growth trend is expected to continue, we raised our annual profit forecast. The company's 2024-2026 EPS is 1.85, 2.60, and 3.44 yuan respectively (the previous forecast was 1.09, 1.57, and 2.27 yuan/share), and the closing price on August 23, 2024 is 33 times PE in 2024. We are optimistic that the development and commercialization of weight loss drugs will bring high demand for simeglutide, tirpotide, and liraglutide APIs. With large orders and new customer cooperation, the company's independent selection business and CDMO business are expected to continue to grow rapidly and maintain an “gain” rating.

Risk warning

Increased competition has led to the risk of price fluctuations in peptide products, fluctuations in CDMO customer and order delivery and loss risks, and the risk of product volumes falling short of expectations, etc.