The company's 1H24 revenue was basically in line with expectations, and the number of new orders was good, but fluctuations in industry sentiment and changes in the external environment were still the biggest uncertainties in short-term performance. We lowered the company's 2024-26 profit forecast by 4-19%, lowered the DCF target price to HK$12.3, and maintained a neutral rating.

Short-term performance was pressured, and profit forecasts and target prices were lowered: 1H24 revenue increased 1.0% year-on-year, excluding COVID-19 growth of 7.7%, which is generally in line with previous company guidelines. Adjusted net profit declined 20.7% year over year, mainly due to 1) In drug discovery services, 1H23's one-time large advance payment brought in revenue of about 0.37 billion yuan (RMB, same below) and gross profit of 300 million yuan, leading to a high base. 1H24 adjusted gross margin decreased by 2.6 percentage points, but the company expected 2H24 to receive large payments of about 0.5 billion yuan; 2) SG&A expenses increased by 0.2 billion yuan, mainly due to the company's strengthening of BD work and global base operations, and the subsidiary Pharmaceutical Federation Increased expenses as an independent listed company. The company maintains its guidance at the beginning of the year: 1) annual revenue and adjusted net profit increased by a high number of units, and 2H gross margin is expected to improve month-on-month, benefiting from large payments and improved operating efficiency; 2) positive free cash flow for the whole year (0.6 billion yuan in 1H24), capital expenditure of 4.8 billion yuan (1H24 invested 1.9 billion yuan), and an annual capital expenditure of 5 billion yuan from 2025 to 26, focusing on capacity expansion in Singapore. We lowered our profit forecast and lowered our target price to HK$12.3. We continue to be cautious about the short-term sentiment and investment sentiment of the industry, but our technical service advantages and unique CRDMO business model will help the company stay in the leading position in the industry for a long time.

The late-stage order signing momentum is good, driving a steady increase in production capacity utilization: the company signed a total of 61 new orders in 1H24 (of which 26 were from the Pharmaceutical Alliance), including 9 “Win Molecule” projects (including 3 clinical phase III and 1 commercialization project), and signed 4 late-stage projects with a multinational pharmaceutical company in July. The company is expected to sign 2 more during the year. Only 1 order for 1H24 moved out of the company pipeline due to geopolitical influence. Ireland's production capacity is climbing well. As large new overseas orders are loaded into the Irish plant for production, the company expects Ireland's 1H25 break-even and capacity utilization rate to rise to 80% in 2026, which in turn will drive the company's overall gross margin to increase by 1-1.5 percentage points each year.