The 1H24 deduction of non-net profit is in line with our expectations

The company announced 1H24 results: revenue of 3.358 billion yuan, -9.5% year on year; net profit to mother of 0.493 billion yuan, -64.5% year over year, a decrease mainly due to changes in the fair value of investment income and other non-current financial assets; deducted non-net profit of 0.64 billion yuan, -19.3% year over year; net profit was in line with our expectations.

Development trends

Order growth was steady, and 2Q24 performance recovered markedly month-on-month. In 1H24, the number and amount of new orders signed by the company achieved good growth. The increase was mainly due to domestic demand from multinational pharmaceutical companies and the increase in overseas clinical demand from Chinese pharmaceutical companies, biotech companies and their partners, and the company's targeted business development strategy paid off; demand for domestic orders from domestic companies stabilized, and the amount increased year-on-year. In 2Q24, the company's revenue was 1.698 billion yuan, +2.3% month-on-month, gross profit 0.705 billion yuan, +12.2% month-on-month, gross profit 41.5%, +3.7ppt, net non-return net profit of 0.337 billion yuan, +11.3% month-on-month, net non-net profit of 19.9%, +1.6ppt month-on-month. We believe that more orders delivered on 2H24 led to a significant month-on-month improvement in revenue and profit margins.

Clinical operations have improved month-on-month, and the company has maintained its leading position. 1H24, revenue from clinical trial technical services was 1.64 billion yuan, -22.17% year-on-year. The decline in revenue was mainly due to a high base due to revenue related to specific vaccine projects, as well as a decrease in the amount of new orders signed in 2023 for domestic clinical operations, and the average unit price decline. As industry sentiment gradually recovers and the company takes positive countermeasures, the domestic innovative drug clinical operation business improved month-on-month in 2Q24, and we expect the improvement trend to continue. The industry's leading position is stable. The company continued to maintain its leading position in the Chinese clinical outsourcing service market with a market share of 12.8% in 2023, and became the only Chinese clinical outsourcing service provider to enter the top ten in the world in 2023 with a global market share of 1.4%.

Continuing overseas expansion, the overseas clinical operation business continues to show a good growth trend. The company continues to invest in overseas markets represented by the United States, Australia and Europe, and has initially established independent overseas business capabilities and brands. 1H24, the company's clinical business and new orders in North America continue to grow rapidly, and currently has a clinical operation team of nearly 100 people in the US. 1H24 acquires Japanese CRO company MedicalEdge to further expand data systems and data management services in Japan and the Asia-Pacific region.

Profit forecasting and valuation

The profit forecast for 2024 and 2025 remains unchanged. The current A share price corresponds to the 2024/2025 price-earnings ratio of 18.5 times/15.9 times. The current H share price corresponds to the 2024/2025 price-earnings ratio of 10.3 times/8.5 times. A-shares remain outperforming the industry rating and target price of 70.00 yuan, corresponding to 26.7 times the price-earnings ratio of 2024 and 22.8 times the price-earnings ratio of 2025, with 43.8% upside compared to the current stock price. H shares remain outperforming the industry rating and the target price of HK$44.00, corresponding to a price-earnings ratio of 15.1 times 2025 and a price-earnings ratio of 12.6 times 2025, with 47.4% upside compared to the current stock price.

risks

Clinical research and development risks, new business development risks, and competition exacerbate risks.