1H24 results were slightly lower than our expectations

The company announced 1H24 results: revenue of 1.352 billion yuan, or -42.19% year over year after excluding large orders; net loss due to mother of 0.17 billion yuan; deducted non-net loss of 0.174 billion yuan; slightly lower than our expectations, mainly due to increased competition in the domestic market, low profit margins in the early stages of production, and capacity utilization rates still climbing after delivery of COVID-19 orders. Considering the pace of on-hand order delivery, the company expects 2H24 revenue to grow month-on-month and achieve positive growth after deducting large orders in 2024.

Development trends

Profit margins improved month-on-month. 1H24, the overall gross margin of the company is 18.82%, of which the gross margin of the overseas market is about 32%, the gross margin of the domestic market is about -11%, and the gross margin of the domestic market is about 13% after deducting the impact of new business. The company implemented a cost reduction and efficiency plan to gradually improve operational efficiency. The 2Q24 gross margin was 21.81%, +5.97ppt month-on-month, and the profit level improved markedly. The impact of the new 1H24 business on net profit to mother was 0.108 billion yuan, including: pharmaceutical CDMO lost 50.96 million yuan, the same year on year; gene therapy CDMO lost 34.68 million yuan, a year-on-year loss of 6.27 million yuan; and the ADC business completed capacity building at the end of 23, with a loss of 21.98 million yuan.

The project pipeline continues to increase, and orders are growing rapidly. In 1H24, the company has signed 533 orders (excluding JSTAR), an increase of about 14% over the previous year; the number of delivered projects was 408, an increase of about 26% over the previous year. As of 1H24, the amount of uncompleted orders in the company's CDMO business for small molecule APIs increased by more than 40% year-on-year, and the company's expected delivery cycle is mainly in the second half of 2024 and 2025.

In 1H24, new orders for CDMO formulations were about 0.113 billion yuan, up about 40% year on year, new orders for gene cell therapy CDMO were 0.062 billion yuan, up about 188% year on year, and new orders for new capabilities such as peptides, oligonucleotides, and ADC surpassed 30 million yuan.

Globalization strategies are progressing steadily, and new capabilities are gradually being implemented. 1H24, the company's new high-activity API kilogram laboratory in New Jersey, USA, was put into operation, and the R&D laboratory at the CDMO R&D and production base for small molecule APIs in Slovenia was completed and put into operation, and the construction of the pilot plant continues to be promoted. In terms of new capabilities, 1H24's peptide and oligonucleotide pilot plant in Fengxian, Shanghai was completed and put into use, and the company's ADC pilot plant in Waigaoqiao, Shanghai was completed and put into use, and passed the first customer's quality audit in May.

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 36.8x/29.5x. Maintaining an outperforming industry rating, but due to recent systemic adjustments in the pharmaceutical sector, we lowered our target price by 26.6% to 14.90 yuan, which corresponds to 47.8 times the 2024 price-earnings ratio and 38.4 times the 2025 price-earnings ratio. There is 29.9% upside compared to the current stock price.

risks

New drug development risks, new business expansion risks, and risk of production capacity utilization falling short of expectations.