Core views

The company's 24H1 revenue and profit were disrupted, mainly due to price fluctuations disrupting the company's heparin API business in the short term. The formulation business continues to gain strength, actively expand overseas markets, and combine channel advantages to ensure steady growth in foreign sales revenue for formulations; the domestic market continues to deepen, and the out-of-hospital market is gradually improving. Gross margin is under pressure in the short term, high investment in R&D is maintained, and operating cash flow remains stable. Looking forward to the future: 1) Currently, the company's export production capacity for sterile injections has doubled, and new overseas drug registration approvals are continuously declared, and overseas formulations are expected to continue to be released; 2) as downstream inventories are digested and inventory removal is basically coming to an end, the price of heparin APIs will gradually rise steadily; 3) Focus on macromolecule business expansion in the medium to long term.

occurrences

The company released the 2024 semi-annual report

The company 24H1 achieved total operating income of 2.143 billion yuan, an increase of -6.99%; net profit to mother of 0.405 billion yuan, an increase of -35.15% year on year; net profit after deducting non-return to mother of 3.6.9 billion yuan, an increase of -39.70% year on year.

Total revenue for the 24Q2 quarter was 1.138 billion yuan, up 14.27% year on year; net profit to mother was 0.228 billion yuan, up -22.02% year on year; net profit after deducting non-return to mother was 1.9.7 billion yuan, up -29.79% year on year. The results were in line with our previous expectations.

Brief review

The price of heparin disrupts the API business performance, and the formulation business is developing well

The company 24H1 achieved revenue of 2.143 billion yuan, a year-on-year increase of -6.99%; net profit to mother of 0.405 billion yuan, up -35.15% year on year; net profit after deducting non-return to mother of 0.369 billion yuan, an increase of -39.70% year on year. 24Q2's total revenue in a single quarter was 1.138 billion yuan, up 14.27% year on year; net profit to mother was 2.2 0.8 billion yuan, up -22.02% year on year; net profit after deducting non-return to mother was 0.197 billion yuan, up -29.79% year on year. On the revenue side, we judge that it was mainly disrupted by the API business. Sales of pharmaceuticals and CDMO increased in the first half of the year, but sales of APIs declined slightly. The profit side is mainly affected by the decline in heparin prices. Judging from customs data, the average export price of heparin in China dropped significantly after October 23. The average export price of 24H1 heparin was 4,915.32 US dollars/kg, while the average price of 23H1 was 9,302.90 US dollars/kg. Prices fell -47.2% year on year in the first half of the year. Price fluctuations disrupted the company's heparin API business in the short term. The results were in line with our previous expectations.

By sector: 1) Short-term disruptions in the API business: 24H1 revenue of 0.533 billion yuan, accounting for 24.9% of revenue and 29.03% gross profit margin. The company's share of revenue in the API sector has dropped from over 60% in 2019 to less than 1/4 of 24H1. The gross margin was 4.6 pct lower than the full year of 2023. Also, considering that the price reduction of heparin APIs mainly occurred in the second half of '23, the gross margin of the 24H1 API business is expected to drop even more significantly year-on-year. Judging from customs data, export prices are currently basically stable. It is expected that as the industry recovers, the API business performance is expected to resume growth.

2) The formulation business continues to gain strength: 24H1 pharmaceutical business revenue of 1.548 billion yuan, accounting for 72.2% of revenue, and a gross profit margin of 44.10%. The company adheres to the pace of agent transformation, and the business has achieved steady growth. By region, foreign formulation sales revenue in the first half of the year was 1.148 billion yuan, accounting for 53.6% of overall revenue, and domestic formulation revenue of 0.399 billion yuan, accounting for 18.6% of overall revenue. The company's formulation business is actively expanding overseas markets, combining Meitheal's advantages on the GPO and channel side to ensure a steady increase in foreign sales revenue for formulations. Currently, the company's overseas commercialization team has more than 100 people, and has built marketing platforms and achieved direct sales of formulations in North America, Europe and South America. In terms of domestic business, basic heparin formulation products continue to penetrate the domestic market, use collection for sales volume, and continue to improve domestic sales and operation channels outside of collection, driving the growth of domestic pharmaceutical sales scale.

Gross margin is under pressure in the short term, and high investment in R&D is maintained. The company's 24H1 gross profit margin was 40.24%, -9.53 pct year on year; 24Q2 company's gross margin was 41.77 percent, -6.81 pct year on year. The profit level fluctuation was mainly due to the price fluctuation of heparin API described above. 24H1 sales expense ratio 6.66% (-4.69 pct), management expense ratio 4.02% (+1.02 pct), R&D expense ratio 8.14% (+1.59 pct), financial expense ratio 0.75% (+4.47 pct). The company's sales expense ratio declined significantly, mainly due to a decrease in sales promotion expenses; management expenses increased due to the increase in personnel remuneration during the reporting period; and the financial expense ratio was mainly affected by the decline in exchange gains and losses. The R&D cost rate has increased, and the company has continued to increase R&D investment. As of mid-24, the company and subsidiaries have had 100 overseas drug registration approvals, and 24H1 has obtained FDA and NMPA approvals for several drugs, including reganosetron injections, dacarbazine hydrochloride injections, estibatide injections, voriconazole for injections, etc., to ensure an efficient R&D pace for one batch, one batch for research, and reserve one batch. The net cash flow from 24H1's operating activities was 0.606 billion yuan, -3.8% year-on-year, and operating cash flow remained stable.

Future prospects: 1) Continued release of overseas formulations: The company adheres to the strategic framework of “based in China and the US, with a global perspective”, and innovation and transformation continues to advance. After 6 new production lines successfully passed the FDA on-site inspection, the company currently has 12 production lines that have passed the US FDA audit, doubling the export capacity of sterile injections, and continuous reporting of the company's new overseas drug registration approvals. The overseas formulation business is expected to continue to be released. 2) Prices of APIs are expected to pick up: Previously, due to downstream companies' inventory removal, the heparin API industry faced an impact. We believe that as downstream inventories are digested and inventory removal is basically coming to an end, the price of heparin APIs will gradually rise steadily. 3) Focus on macromolecule business development in the medium to long term: The company purchased ownership of the US FDA approval for the adalimumab biosimilar drug YUSIM RY developed by Coherus in June 2024. Previously, the company also cooperated with Tonghua Dongbao on three types of insulin, Mendong, Glycerin, and Lipong, and reached cooperation with Shuangcheng Pharmaceutical to obtain exclusive agency rights in the US market. The company has significant advantages in overseas channels. 24H1 already operates nearly 100 products in the North American market. Subsequent pipeline expansion in the field of biosimilar drugs and complex formulations will provide a solid guarantee for the company's medium- to long-term performance growth.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 42.16 billion yuan, 53.11 billion yuan, and 6.414 billion yuan, respectively, up 7.2%, 26%, and 20.8% year on year; net profit to mother will be 8.45 billion yuan, 11.29 billion yuan, and 1,458 billion yuan, respectively, up 546% (reverse loss), 33.7% and 29.1% year on year, respectively. Equivalent EPS is 0.52 yuan/share, 0.7 yuan/share, and 0.9 yuan/share, respectively. The corresponding PE is 21.6X, 16.2X, and 12.5X, maintaining a “buy” rating.

Risk warning

Risk of fluctuation in raw material prices: The main raw material of the company's products is crude heparin. If the price fluctuates greatly, it will have a big impact on the company's production costs. If the price increase cannot be passed on downstream, it will affect the company's profit performance.

Risk of changes in the international trade environment: Currently, the company's products are mainly exported, accounting for more than 70%. 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.

Risk of changes in the competitive landscape of the industry: Currently, a few mainstream international heparin formulation manufacturers have the vast majority of the market share. As the protection of patented drugs expires, new generic drugs are launched, and new patented drugs are introduced, it may have a great impact on the heparin drug market pattern. If the product market share of the company's main partners changes significantly, it may be further transmitted to the company's product sales, which will adversely affect the company's production and operation.

Industry policy risks: At present, centralized procurement of national pharmaceuticals and medical insurance negotiations are gradually being normalized. If the company's main heparin preparation products cannot win the bid in national procurement, sales of the company's heparin formulation products at public medical institutions may be restricted, which will adversely affect the company's domestic market share and business performance.