Incident: The company released its 2024 mid-year report. In the first half of 2024, the company achieved operating income of 2.697 billion yuan, a year-on-year decrease of 41.63%; net profit to mother was 0.499 billion yuan, a year-on-year decrease of 70.40%; after deducting non-return net profit of 0.448 billion yuan, a year-on-year decrease of 71.41%.

The elimination of large orders affected the steady growth of the main business, and new orders gradually resumed. In terms of revenue split, excluding the impact of large orders in the first half of 2024, overall revenue was +0.8% year-on-year. In addition, in the first half of 2024, the US market customer revenue excluding large orders increased by about 26.92% year over year, and customer revenue from the European market increased by 22.75% year over year. On a quarterly basis, 2024Q2 revenue was 1.298 billion yuan (-45.31%), the mother was 0.217 billion yuan (-79.44%), after deducting non-0.194 billion yuan (-79.55%). In terms of orders, the company's new orders increased by more than 20% year-on-year in the first half of 2024, and there was a significant increase in the second quarter compared to the first quarter. Among them, the growth rate of customer orders from the European and American markets exceeded the company's overall order growth rate. As of the end of August 2024, excluding confirmed operating income during the reporting period, the company's total on-hand orders amounted to $0.97 billion. In terms of profitability, the company's overall gross profit margin for the first half of 2024 was 42.15% (-10.91pp), and the net profit margin was 18.50% (-17.99pp). Sales cost 0.102 billion yuan (+24.86%), cost ratio 3.80% (+2.03pp).

Management fee 0.362 billion yuan (+8.02%), cost ratio 13.42% (+6.17pp). Financial expenses -0.188 billion yuan, cost rate -6.99% (-4.05pp), R&D expenses 0.329 billion yuan (+1.61%), cost ratio 12.19% (+5.19pp).

Small molecule CDMO+ emerging business is two-wheel drive, and long-term growth can be expected. 1) Small molecule CDMO: 2024H1 small molecule CDMO earned 2.195 billion yuan, +2.49% year over year after excluding large orders. Among them, revenue during the commercialization phase was about 1.396 billion yuan, or +2.49% year-on-year after excluding large orders. Clinical-stage revenue was about 0.799 billion yuan, down 6.97% year over year. Furthermore, according to current orders, the number of verification and approval phase (PPQ) projects is expected to reach 28 in 2024, forming sufficient commercial order reserves, providing a strong guarantee for long-term steady growth. 2) Emerging business: 2024H1 emerging business revenue of 0.5 billion yuan (-5.77%), which we expect is mainly due to fluctuations in domestic investment and financing. Among them, ① chemical macromolecules: revenue decreased 19.74% year on year, on-hand orders +119% year over year, and total solid phase synthesis production capacity reached 14,250L; ② formulations: revenue decreased 17.36% year on year, 80 projects were delivered, including 16 overseas projects; ③ Clinical research services: revenue decreased 23.78% year on year, undertaking 159 new projects; ④ Biomacromolecules: revenue increased year on year 1.42%. By the end of August 2024, biopharmaceutical CDMO had close to 100 orders, and ADC projects accounted for more than 50% of the total number of orders.

Profit forecast and investment advice: Due to the slight fluctuation of COVID-19 orders due to downstream demand, we adjusted the profit forecast. We expect the company's revenue to 2024-2026 to 5.928, 7.124, 8.821 billion yuan (about 6.497, 7.818, 9.833 billion yuan before the adjustment period), up -24.24%, 20.17%, and 23.83% year-on-year, due to emerging businesses being invested, resulting in net profit of 1.036, 1.34, 1.709 billion yuan (about 1.253, 1.629, 2.053 billion yuan before adjustment 2025-2026), a year-on-year increase of -54.35%, 29.36%, and 27.54%. Consider that the company has become a domestic CDMO leader with comprehensive advantages such as technology, leading the rapid growth of the industry and maintaining a “buy” rating.

Risk warning events: The public data used in the research report may have the risk of information being delayed or not updated in a timely manner; risk of loss of core technicians; risk of rising raw material supply and prices; risk of environmental protection and production safety; risk of exchange rate fluctuations.