1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 0.85 billion yuan, -16.08%; net loss to mother of 0.187 billion yuan, -287.3%; deducted non-net loss of 0.2 billion yuan, -359.0% year on year; of these, laboratory services contributed a net loss of 15.24 million yuan, -107.8% year over year, profit from fund management revenue contributed 52.21 million yuan, and net loss of 0.24 billion yuan due to changes in the fair value of biological assets; performance It fell short of our expectations, mainly due to pressure on industry demand and increased market competition.

Development trends

The month-on-month improvement was evident, and the number of newly signed projects increased steadily. In 2Q24, the company's revenue was 0.525 billion yuan, +61.5% month-on-month, net profit of 0.1 billion yuan (1Q24 was a loss of 0.27 billion yuan), after deducting non-net profit of 0.08 billion yuan (1Q24 was a loss of 0.28 billion yuan). In 1H24, the company signed a new order of 0.9 billion yuan. The number of new projects signed continued to grow. The number of new orders signed in 2Q24 increased 20% over 1Q21, and the number of ADC projects among the newly signed projects increased markedly. As of 1H24, orders in hand were 2.9 billion yuan, and the number of research projects has maintained a steady growth trend. 1H24, the overseas subsidiary signed a new order of 0.14 billion yuan.

The project experience continues to be rich, and the quality system continues to improve. With 2019-1H24, the company added a total of 1,600 biopharmaceuticals, about 1180 chemical drugs, and more than 50 non-clinical research projects for traditional Chinese medicines. It is in a leading position in the country in terms of the number of non-clinical evaluation projects for new drugs and the number of non-clinical evaluation projects for new biological drugs. On 1H24, the company successfully passed the FDA GLP on-site inspection. This is the 3rd time the Beijing facility has undergone the FDA GLP on-site inspection, and it is also the 5th time that two of the company's facilities (Beijing and Suzhou) have passed the FDA GLP inspection.

Production capacity construction is progressing in an orderly manner. The construction of the 20,000 square meter facility in Suzhou Zhaoyan II was capped in 2023, and the company expects it to be put into use in early 2025. Suzhou has begun construction of 22,000 square meters of supporting facilities, which are currently being renovated. The company expects to complete and put them into use by the end of 2024. The wholly-owned Sun Company, Guangxi Weimei, is actively building an experimental business system for non-human primate model animals. The company expects to start construction of related supporting laboratories in the second half of 2024. According to the company's strategic plan and business requirements, the construction of the Guangzhou Zhaoyan Security Assessment Base is currently progressing in an orderly manner.

Profit forecasting and valuation

Due to increased competition in the industry and net losses due to changes in the fair value of biological assets, we lowered 2024/2025 net profit by 52.9%/33.3% to 0.189 billion yuan/0.334 billion yuan. The current A share price corresponds to the price-earnings ratio of 29.5 times in 2025, and the price of H shares corresponds to 12.9 times the price-earnings ratio in 2025. A/H shares have maintained an outperforming industry rating. We lowered our target price of A shares by 18.6% to 17.50 yuan, corresponding to 39.2 times the 2025 price-earnings ratio. Compared with the current stock price, we lowered the target price of H shares by 20.8% to HK$9.50 to correspond to 18.7 times the price-earnings ratio of 2025, with 44.4% upside compared to the current stock price.

risks

New drug development risks, capacity utilization rates falling short of expectations, changes in the fair value of biological assets, and intensification of competition.