Joinn reported a 16% YoY decline in 1H24 revenue, with GPM dropping by 19ppts YoY. Additionally, a net loss in fair value of biological assets resulted in an attri.net loss of RMB170m in 1H24, compared to a net profit in 1H23. As of 30 June 2024, its backlogs stood at RMB2.9bn, down from RMB3.38bn as of 31 March 2024 due to the cessation of some orders. We believe Joinn's performance will remain under pressure due to shrinking domestic demand, leading to intensified competition and declining order prices. As a result, we cut TP to HK$7 from HK$23, based on a 10-y DCF model, with WACC increased to 13.3% and terminal growth reduced to 2.5%, reflecting the lower earnings projection and heightened competition. Downgrade to HOLD.
Key Factors for Rating
Revenue decline and net loss in 1H24 due to intensified competition. Joinn reported 1H24 revenue of RMB849m, down 16% YoY, with GPM at 25%, compared to 44% in 1H23, reflecting intensified competition. Despite significant declines in revenue and GP, the company's selling and admin expenses increased, leading to a sharp rise in expense ratios. Combined with the RMB254m net loss from the fair value adjustment of biological assets (research models), Joinn recorded an attributable net loss of RMB170m in 1H24, compared to a net profit of RMB91m in 1H23.
Decline in backlogs despite stable new orders. In 1H24, Joinn secured new orders totaling RMB900m. However, as of 30 June 2024, its backlog decreased to RMB2.9bn, down from RMB3.38bn as of 31 March 2024, primarily due to some customers halting the execution of backlog orders. The company's overseas subsidiaries secured orders totaling RMB140m in 1H24. However, order intake at BIOMERE, its US subsidiary, also slowed due to capacity constraints.
Weak industry demand persists. Although Joinn posted a NP of RMB102m in 2Q24, reversing the net loss in 1Q24, we believe the company's performance will remain to be under pressure due to shrinking demand, intensified competition, and declining order prices which may persist given the current financing situation in domestic market. Additionally, as a key indicator of industry demand trends, market prices for research models are unlikely to rebound and contribute significantly to Joinn's NP in the near term.
Key Risks for Rating
1) Intensified competition; 2) financing pressure within biotech industry; 3) price reductions of research models.
Valuation
We revised our TP to HK$7 from HK$23, based on a 10-year DCF valuation with WACC increased from 12.4% to 13.3% and terminal growth reduced from 3.5% to 2.5%, factoring in the lower earnings projection and intensified competition. Downgrade to HOLD.
