The accurate diagnosis business is growing steadily, and pathological diagnosis is accelerating the replacement of domestic production. In the accurate diagnosis sector, the company is mainly divided into two businesses: IVD for in vitro diagnosis and research reagents. Among them, the biochemical IVD business entity is Shanghai Zhicheng, a wholly-owned subsidiary, and Shanghai Aoyuan, a wholly-owned subsidiary, includes the two businesses of pathological diagnosis and scientific research reagents. Shanghai Aoyuan's revenue increased from 0.582 billion yuan in 2020 to 0.897 billion yuan in 2023, and Shanghai Aoyuan's net profit increased from 0.102 billion yuan in 2020 to 0.236 billion yuan in 2023; the increase in the number of installations of the company's second-generation fully automatic immunohistochemical dyeing equipment is expected to drive rapid growth in the pathological diagnosis business.

The umbilical cord blood storage business has declined slightly, and there is great potential for adult immune cell storage. The decline in the number of newborns born in recent years has put a lot of pressure on the company's umbilical cord blood storage business, but since the charging model for cord blood storage is in the form of down payment+annual storage fee, the amount of stock stored is large, and the annual storage fee revenue also accounts for a relatively large amount of revenue, and the revenue from the cord blood storage business is expected to decline slightly. With the development of immune cell and stem cell therapy technology and the continuous expansion of the scope of clinical research, the field of cell storage has formed diverse needs, and the adult cell storage market is broad.

Domestic stem cell drugs ushered in major policy benefits. The number of INDs was nearly 100 in 3 years. From initially forming a huge market size as medical service supervision, to completely discontinuing stem cell treatment, to issuing a large number of technical guidelines in the past two years, mainly in the form of drugs, research and development of new stem cell drugs in China has accelerated. From the beginning of 2020 to the present, a large number of technical guidelines for supporting stem cell drugs have been introduced. From preclinical pharmacy research guidelines for stem cell drugs, clinical research guidelines, and even clinical research guidelines focusing on specific indications of stem cells, it has indicated stem cell drug reporting methods and standards for pharmaceutical companies. Since 2020, the number of stem cell drugs IND declared by domestic pharmaceutical companies has doubled. Currently, several stem cell drugs have entered clinical phase III.

The company's innovative stem cell drug has multiple indications for clinical use. The participating company Sanli Heze's dental pulp stem cell phase II clinical trial began in May 2023. After the country clarified the stem cell drug declaration route in 2018, the VUM02 injection (human umbilical cord derived mesenchymal stem cell injection) independently developed by Wuhan Guanggu Pharmaceutical, a wholly-owned subsidiary of the company, has declared clinical trials for six indications: decompensated liver cirrhosis, idiopathic pulmonary fibrosis, slow acute (subacute) liver failure, acute respiratory distress syndrome, acute graft-versus-host disease, and systemic sclerosis. The participating company Beijing Sanli Heze Biotech and Capital Medical University have completed phase I clinical trials and clinical summary reports on the “human pulp mesenchymal stem cell injection” to treat chronic periodontitis, and will begin phase II clinical trials in 2023. The incidence of periodontitis is extremely high and extremely harmful. We expect dental pulp stem cells to become a major single product.

Investment advice: We expect the company's net profit to be 0.147/0.171/0.2 billion yuan in 2024-2026, with growth rates of 38.1%/16.2%/17.3%, respectively. Based on the segment valuation, the company was given a reasonable market value of 9 billion dollars in 2024. Considering the catalysis of the stem cell industry at home and abroad, the innovative stem cell drug from Wuhan Guanggu Zhongyuan is rapidly advancing clinical trials. The innovative dental pulp stem cell drug with three benefits is expected to become a major single product, covered for the first time, and given a “recommended” rating.

Risk warning: risk of collecting pathologic IVD, risk of developing innovative stem cell drugs, risk of falling short of expectations in adult immune cell storage business, risk of impairment of accounts receivable, risk of promotion of new stem cell drugs.