Core views

The company's 24H1 revenue side performance is steady, profit side growth is rapid, various business segments continue to have stable operating advantages, and overall performance is good. The strength of the specialty APIs business in the pharmaceutical APIs sector contributed positively to the performance. The animal insurance sector is actively seeking strategic cooperation with breeding groups and major mobile preservative companies, and products such as fluphenicol and doxycycline have further increased their market share. The pharmaceutical intermediates business increased exports to the international market and achieved contrarian growth. Profitability is rising steadily, and expenses are well controlled. Looking to the future:

1) The specialty APIs business is expected to continue to gain strength; 2) the animal insurance business is expected to pick up steadily; 3) Production capacity expansion will drive the growth of the intermediate business and provide industrial chain support for the company's pharmaceutical and animal protection APIs and formulations business, reducing costs and improving supply stability.

occurrences

The company released the 2024 semi-annual report

On August 29, the company released its 2024 semi-annual report. 24H1 achieved revenue of 28.9.2 billion, +2.94% year over year; net profit to mother 0.405 billion, +13.18% year over year; net profit after deducting non-return to mother 0.395 billion, +10.44% year over year.

24Q2 achieved revenue of 1.554 billion in a single quarter, +11.01% year over year; net profit to mother 0.206 billion, +26.42% year over year; net profit after deducting non-return to mother 0.202 billion, +21.99% year over year.

Brief review

Performance is in line with expectations, and pharmaceutical raw materials and intermediates are gaining strength

24H1 achieved revenue of 2.892 billion, +2.94% YoY; net profit to mother 0.405 billion, +13.18% YoY; net profit before deducting non-attributable net income of 3.9.5 billion, +10.44% YoY. 24Q2 achieved revenue of 1.554 billion in a single quarter, +11.01% year over year; net profit to mother 0.206 billion, +26.42% year over year; net profit after deducting non-return to mother 0.202 billion, +21.99% year over year. The company's 24H1 revenue side performance was steady, and the profit side grew rapidly. The profit side grew by more than 20% in a single quarter in Q2. Various business segments continued to stabilize their operating advantages, and the overall performance was good.

By sector: 1) Pharmaceutical raw materials: 24H1's pharmaceutical raw materials revenue is 1.326 billion yuan, accounting for 46.09%. Pharmaceutical raw materials are the company's core business segment. On the basis of the original superior categories of macrolides and quinolones, the company 24H1 set up an independent specialty APIs division management team to coordinate R&D, registration, production, marketing and other resources, effectively improving the operating efficiency of the specialty APIs business. The gross margin of specialty drugs usually has an advantage over bulk APIs. It is expected that the strength of the 24H1 specialty drug business will positively contribute to the company's gross profit.

2) Animal protection APIs: 24H1 has revenue of 0.739 billion yuan, accounting for 25.69%; the company's animal insurance sector has obvious brand advantages such as fluorphenicol, doxycycline, enrofloxacin, etc., and is also the main supplier of specialty animal protection APIs such as mabofloxacin, sarafloxacin, dikrezuli, cialazine, gamimycin, etc. Currently, 16 animal protection API products have been registered and approved domestically. 24H1 is actively seeking strategic cooperation with breeding groups and mainstream preservative companies, and products such as fluphenicol and doxycycline have further increased their market share. Currently, the price of the representative product fluphenicol is at the bottom, which may slightly disrupt the revenue side of the company's animal insurance business. Further optimization of the supply and demand relationship is expected to bring more growth to the company's performance.

3) Key pharmaceutical intermediates: 24H1 has revenue of 0.599 billion yuan, accounting for 20.81%. The company's intermediate business mainly focuses on reducing agent series products, advanced amine series products, etc., and is one of the leading domestic companies in the production capacity of intermediates such as sodium borohydride, potassium borohydride, and cyclopropylamine. The layout of the intermediate business enables the company to form an advantage in the intermediate-API and formulation integrated industrial chain, and can better reduce the cost of the company's pharmaceutical and animal insurance API business and improve supply stability. 24H1's key pharmaceutical intermediates business faced weak domestic demand, increased exports to the international market, and achieved contrarian growth.

4) Formulations and others: 24H1's revenue was 0.213 billion yuan, accounting for 7.41%. The company's formulations include pharmaceutical preparations and animal protection preparations. Pharmaceutical preparations extend from the company's main dominant raw materials, macrolides, quinolones, etc., and representative categories of animal protection agents include categories such as fluorphenicol and enrofloxacin.

24H1's pharmaceutical semi-pharmaceutical business and commercialization projects for key international customers such as Abbott have achieved remarkable results. Overall, in the first half of the year, in the context of full competition in the industry, the company continued to dig deep and optimize production processes, continuously improve product competitiveness, and improve operating efficiency while maintaining a stable and advantageous business. 26 major products maintained a good business pattern. Of these, 20 products achieved sales volume growth, driving performance to show a good operating momentum.

Profitability is rising steadily, and expenses are well controlled. The company's 24H1 gross profit margin was 26.6%, +1.96 pct year on year; net profit margin was 13.98%, year on year +1.28 pct; 24Q2 company gross margin was 25.87 percent, +3.22 pct year on year; net profit margin was 13.25 percent, +1.68 pct year on year; we think it is mainly related to the steady development of the company's various sectors, while the strength of specialty pharmaceuticals drives gross margin growth. 24H1 Sales Expense Ratio 1.11% (-0.05 pct), Management Expense Ratio 5.21% (-0.22 pct), R&D Expense Ratio 3.21% (-0.26 pct), Financial Expense Ratio -0.73% (+0.71 pct). The basic control of the company's expenses was stable, and the slight increase in financial expenses was mainly due to a decrease in current interest income, exchange earnings, and an increase in interest expenses. In terms of R&D, the company established Guobang (Zhejiang) Research Institute and Guobang (Shandong) Research Institute to continuously improve independent innovation capabilities. It has more than 530 R&D technicians. As of 24H1, the company has 203 authorized patents, including 194 invention patents. Subsequent R&D investment is expected to guarantee the company's competitiveness. The net cash flow from 24H1's operating activities is 0.25 billion yuan, compared to 0.032 billion yuan in the same period last year. The negative operating cash flow is mainly due to the impact of the company's cash payments due to the maturing acceptance of large bills payable and the increase in advance payments for raw materials, and is expected to return to normal throughout the year. Other financial indicators are generally stable.

Future prospects: 1) Continued strength in specialty APIs: The company has actively entered the field of specialty APIs in recent years. Currently, the company has deployed specialty drug types, including vigliptin, apixaban, rivaroxaban, etc., which have broad market prospects and are expected to be released in the context of a patent cliff. Equal varieties of miglinide calcium and azetidine have strong differentiated competitive advantages. 24H1 set up an independent specialty drug management team. It is optimistic that the revenue scale and operating efficiency of the specialty APIs sector will continue to improve in the future, driving the company's profit level to the next level. 2) The animal insurance business is expected to pick up steadily: The prices of the company's main varieties, fluorphenicol and doxycycline, were affected by supply and demand. Currently, prices are in the bottom range. Subsequently, as backward production capacity is gradually cleared, the supply side is expected to be optimized; currently, the pig cycle is picking up, and demand-side veterinary drug usage is expected to rise marginally, and the company's animal insurance business is expected to rise steadily. 3) Production capacity expansion drives intermediate business growth: In terms of project construction, 24H1's key pharmaceutical intermediate project with an annual output of 70,000 tons and technical improvement projects with an annual output of 1,420 tons of pharmaceutical raw materials and intermediates are progressing in an orderly manner, and the cipropanamine industry chain extension project is being implemented according to plan. The company's intermediate sector has the largest production capacity in China. The promotion of project construction drives the continuous growth of the company's intermediates sector and provides industrial chain support for the company's pharmaceutical and animal protection APIs and formulations business, reducing costs and improving supply stability.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be $58.47, 65.64 billion, and 7.39 billion yuan, respectively, up 9.3%, 12.3%, and 12.6% year-on-year; net profit to mother will be 8.05, 9.58, and 1,121 million yuan, respectively, up 31.4%, 19.1%, and 17.1% year-on-year, respectively. Equivalent EPS is 1.44 yuan/share, 1.71 yuan/share, and 2.01 yuan/share, respectively. The corresponding PE is 12.9X, 10.8X, and 9.3X, covered for the first time, giving a “buy” rating.

Risk warning

Risk of changes in the international trade environment. The company's current products include many export varieties, accounting for nearly half of overseas revenue, and there is uncertainty about changes in the overall international trade environment and policy. If global trade frictions intensify further in the future, it may adversely affect the company's operations.

Industry competition intensifies risks: Currently, the competitive pattern in the market where the company's main products are located is relatively stable. If prices rise further and more competitors join the market in the future, increased competition may reduce the company's profit level; in addition, if additional production capacity is supplied in international markets such as India, it may have an impact on the prices of the company's related varieties.

Risk of price fluctuations of major products: The core business segment of the company's pharmaceutical raw materials has dominant categories of macrolides and quinolones. Prices of macrolides products have been rising in recent years. Significant price fluctuations in the future will affect the company's main business revenue growth.

Sensitivity analysis: Currently, the company's pharmaceutical raw materials are the main source of revenue, and the expansion of the specialty APIs business has a driving effect on revenue growth and profit levels. If the pharmaceutical sector falls short of expectations and the 2024-2026 revenue falls to 40.0, 44.9 billion yuan, and 4.93 billion yuan, then the 2024-2026 revenue growth rate will drop to 6.81%, 11.29%, and 11.20%. The corresponding net profit growth rate to mother was adjusted to 28.63%, 18.15%, and 15.67%.