1H24 results were slightly lower than our expectations

The company announced 1H24 results: revenue of 2.764 billion yuan, -15.07%; net profit to mother of 0.475 billion yuan, -23.62% year over year; deducted non-net profit of 0.468 billion yuan, -23.66% year on year; slightly lower than our expectations, mainly due to weak demand for veterinary drugs from CDMO and inventory removal of some raw materials.

Development trends

Featured APIs are growing steadily, and CDMO pipelines are becoming more and more abundant. Looking at the 1H24 segment: revenue from specialty APIs and intermediates was 0.732 billion yuan, +5.5% year over year, gross profit margin 21.2% year on year, -10.9ppt, gross margin decline was mainly due to disruptions in the inventory removal cycle; CDMO revenue was 1.971 billion yuan, -20.6% year over year. The revenue decline was mainly due to weak demand in the veterinary drug market, with a gross profit margin of 41.1%, +0.1ppt year over year. In terms of the number of 1H24 projects, the number of new projects added to the 1H24 API CDMO was +14%. As of 1H24, it had undertaken 34 marketing projects, 81 phase III clinical trials, and 988 phase I and II clinical trials. On 1H24, some of the first phase of Jiuzhou Pharmaceutical (Taizhou) projects were put into use. At the same time, the company invested in the construction of R&D service platforms in Japan and Germany, and intervened in the R&D pipelines of overseas customers earlier.

Build a platform for emerging technologies. 1) Peptides: 1H24, the company established the TIDES division and accepted multiple peptide orders. The company applies unique non-classical solid-phase synthesis technology to the production of products, greatly reducing production costs and enhancing competitiveness. At the same time, the company has completed the peptide platform and production capacity layout plan, and the company expects GMP production capacity to increase rapidly in the next few years. 2) Coupling: 1H24, the coupling platform completes the delivery of multiple compounds. We look forward to an increase in the number of projects we undertake in the future. 3) Small nucleic acid: The company has completed the construction of small nucleic acid drug research and development platforms at two sites in the US and China, and has undertaken a number of customized businesses. The company is speeding up the construction of a small nucleic acid GMP pilot production platform and GMP commercial workshop.

Accelerate the integration of generic API formulations. In 1H24, Formulation CDMO added nearly 20 new customers, +32% year-on-year, with revenue exceeding +50%. As of 1H24, the company's formulation pipeline has a total of 22 projects. Of these, 4 projects have been approved, and 6 projects have submitted listing applications and are in various stages of review and approval. In terms of technology platforms, the company has established many core formulation technology platforms such as slow-release formulation platforms, insoluble drug dissolution technology platforms, oral instant dissolution technology platforms, hot melt extrusion platforms, etc., and has jointly built a joint laboratory with China Pharmaceutical University to help further enhance and improve the technology platform.

Profit forecasting and valuation

The profit forecast for 2024 and 2025 remains unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 9.2x/7.7x. Maintaining an outperforming industry rating, but due to recent systemic adjustments in the pharmaceutical sector, we lowered our target price by 27.8% to 15.60 yuan, which corresponds to 11.9 times the 2024 price-earnings ratio and 10.0 times the 2025 price-earnings ratio. There is 29.4% upside compared to the current stock price.

risks

Terminal product sales fall short of expectations, technology iteration risks, policy changes, market competition, environmental protection and safety.