Matters:

The company 24H1 achieved revenue of 2.697 billion yuan (-41.63%), realized net profit of 0.499 billion yuan (-70.40%), and net profit after deduction was 0.448 billion yuan (-71.41%). Within the scope of previous announcements.

Ping An's point of view:

Revenue from large orders increased slightly, and gross margin of core business remained good

The company's large order performance contribution at 23H1 was still relatively high. Under the high base, the company's 24H1 revenue and profit declined sharply. If the impact of large orders was excluded, the company achieved a slight increase of 24H1 revenue, including small molecule CDMO +2.49% (after selecting large orders) and -5.77% for emerging businesses. Considering the length of order conversion revenue, it is basically in line with the 23H2 global investment and financing environment.

The company's overall gross margin for the first half of the year was 42.15%, with a gross profit margin of 47.19% for the small molecule business (41.58% in the clinical phase and 50.41% in the commercial phase). Although the year-on-year decline was significant, it remained at a good level (comparable to the company's gross margin when there were no large orders before the pandemic and the gross profit margin of peers), and the results of the company's production capacity investment control and cost control were ideal. The gross margin of the emerging business was 20.29% (-13.46pct). The gross margin dropped sharply due to factors such as early expansion of production capacity, weak market demand, and fierce domestic price competition. The profitability of this business is expected to take a long time to recover.

The growth of new orders is accelerating, which is expected to drive a recovery in later performance

The company signed more than 20% of new orders in the first half of the year, and the number of orders signed in Q2 increased significantly compared to Q1. Among them, the growth rate of orders from European and American customers exceeded the overall growth rate, once again confirming the recovery in demand in the overseas innovative drug market represented by Europe and the US. As of the end of August, the total number of orders in the company was 0.97 billion US dollars, which has good coverage of 24H2 and the first half of '25. With a recovery in core business+an increase in capacity utilization in emerging businesses, we estimate that the company will be able to achieve better performance than the first half of the year in 24H2 and 25, gradually breaking out of the shadow of a cold investment and financing winter and a high base of large orders.

Maintain a “Highly Recommended” rating. According to the current state of the industry's investment and financing environment and the company's production capacity allocation, the adjusted net profit profit forecast for 2024-2026 is 1.105, 1.527, and 2.023 billion yuan (originally 1.255, 1.672, 2.14 billion yuan). In 2024, the company's apparent performance in Q1-Q3 is expected to be poor due to the high base of large orders last year. The decline in performance due to such incidental factors does not affect the company's own texture and profitability. Excluding large order volumes, the company is expected to achieve steady growth. From a valuation perspective, the one-time income from large orders is not reflected in the market value, and it is expected that the industry and companies will complete adjustments in 2025 and return to relatively rapid growth. They are highly cost-effective in terms of valuation, and maintain a “highly recommended” rating.

Risk warning: 1) Geopolitical changes may affect the acceptance of overseas business; 2) Global pharmaceutical innovation investment and outsourcing ratio falls short of expectations; 3) CDMO orders cannot be successfully released due to failure in drug development or drug marketing and sales falling short of expectations; 4) Production accidents, regulatory warning letters, or other situations that cannot meet customer needs, companies may lose orders and even customers.