Key points of investment

2024H1's proprietary APIs are under short-term pressure due to the high price base and inventory removal from overseas customers. Formulations have achieved steady growth under the “three-paragraph theory” of the impact of domestic production and sales of large varieties. I am optimistic that 24H2 new product release plus API regulations will bring flexibility to market development.

Financial performance: Q2 revenue is under pressure, profit is steady

2024H1's revenue was 2.138 billion yuan, up 0.93% year on year, and net profit to mother was 0.34 billion yuan, up 12.56% year on year. Net profit after deduction of 0.331 billion yuan increased 11.78% year over year.

Looking at a single quarter, 2024Q2's revenue was 1.1 billion yuan, down 5.25% year on year, net profit to mother was 0.189 billion yuan, up 11.80% year on year, and net profit not back to mother was 0.186 billion yuan, up 13.35% year on year.

Growth analysis: APIs are under pressure, formulation is stable

Looking at the business split, 2024H1 formulation sales revenue was 1.215 billion yuan, up 10.6% year on year, of which sales revenue of proprietary pharmaceutical products was 1.163 billion yuan, up 9% year on year; revenue from gynecological family planning was 0.233 billion yuan, down 1% year on year; revenue from anaesthetic muscle relaxation was 0.063 billion yuan, up 28% year on year; respiratory revenue was 0.393 billion yuan, up 30% year on year; and dermatology revenue was 0.12 billion yuan, up 26 year on year %; Generic drug revenue was 0.3 billion yuan, down 6% year on year, mainly due to the ninth batch of collection. The company's product dexamethasone sodium phosphate injection decreased by 26 million year over year. If the factors affected by desodium needle collection were excluded, other products maintained a 3% increase.

Sales revenue of APIs and intermediates was 0.91 billion yuan, down 9% year on year. Among them, sales revenue of the main proprietary APIs was 0.489 billion yuan, down 1.2% year on year, and sales revenue of the Italian subsidiary was 0.297 billion yuan, down 15% year on year. Revenue declined mainly due to downstream customers in overseas markets leaving inventory, some countries affected by economic environment and exchange rate factors, and upstream price fluctuations of corticosteroid products on the purchasing side. Xianyao Trading Company's sales revenue was 0.11 billion yuan, others Trade in APIs was 0.012 billion yuan.

Outlook: Optimistic about the continuation of API toughness, formulation+innovation to implement a new cycle of preparation business stock collection, optimistic about incremental release drive: We believe that under the “three-stage theory” of sales, the formulation business is expected to continue the growth trend in the first half of the year, due to refined management of stock products and rapid market coverage of new products: ① Anesthetic muscle relaxants have steadily rebounded, and the impact of collection is clear. Sales of the new product glucosamine injections have continued to grow at an accelerated pace. Sales of the new product, sucralose injection, will participate in bid renewal to seize the gynecological market; The impact of the provincial intake of progesterone capsules is gradually being digested, which is a barrier to the market and release of generic drugs one after another. ② In 2024, it will return to a growth trajectory; key approved products include norethisterone enanthate injections, drospirenethylestradiol tablets (II), estradiol valerate tablets, etc., and products with high potential that have been declared unapproved include didroprogesterone tablets. ③ The effects of losing the standard collection of generic dexamethasone sodium phosphate injections gradually became clear, and steady growth resumed. ④ Respiratory medicine and dermatology are expected to maintain relatively rapid growth.

API and intermediates business: Price declines have increased, and I am optimistic about the 24H2 growth inflection point. According to the announcement “The increase in sales volume of APIs overcame the adverse effects of falling sales prices, and sales of the company's own APIs increased in the first half of 2024, and sales remained basically flat”, we are optimistic that under the company's compliance capacity advantages and market development, sales of proprietary APIs may continue to grow in the second half of the year, and regulatory market orders are expected to contribute to flexibility. Furthermore, considering the impact of downstream customers in overseas markets such as inventory removal, we expect Newchem to remain under pressure in the second half of the year and is expected to resume growth in 2025. Overall, if the neutral assumption is that 24H2 prices remain at the bottom, the revenue from the API and intermediates business is expected to remain flat and increase slightly throughout the year.

Innovation is gradually realized: The company focuses on developing product innovation iterative pipelines in the three major treatment fields of gynecology, perioperative period, and respiratory medicine. On August 30, 2024, the company and Omer Pharmaceuticals completed the NDA submission of Omexone Sodium, a Class 1.1 innovative drug. CZ1S, a long-acting analgesic preparation, continues to advance, and the pipeline from generic drugs and difficult to replicate to innovative drugs is gradually being implemented. I am optimistic that the company's product iterative upgrade and medium- to long-term growth curve will unfold.

Profitability: The increase in gross margin led to an increase in net profit margin. I am optimistic that the improvement in profitability will continue the 2024H1 company's gross profit margin of 54.84%, up 3.16 pcts year on year; net sales margin was 16.26%, up 2.05 pct year on year; net profit margin after deduction was 15.51%, up 1.51 pct year on year. Looking at the cost ratio, the H1 sales expense ratio was 22.83%, up 1.15 pct year on year; the management cost ratio was 7.43%, down 0.06 pct year on year; the R&D cost ratio was 5.84%, up 1.43 pct year on year, and the financial cost ratio was -1.10%, down 0.66 pct year on year.

Looking ahead to the full year of 2024, we expect the overall gross margin of formulations to increase as uncollected high-margin new products are launched, the cost reduction and efficiency of APIs is promoted, and the regulatory market expands. With the promotion of new products and the establishment of the company's marketing system, the sales cost rate may increase. The R&D cost rate may increase slightly as the research project progresses. As a result, net interest rates in 2024 will increase compared to 2023 as a result.

Operational efficiency: Marketing reforms may put pressure on operating cash flow in the short term. We are optimistic that subsequent improvements will result in net cash flow of 0.095 billion yuan from the company's operating activities in 2024H1, down 60.75% year on year. The cash/operating income received from sales of goods and services was 75.27% lower than 23H1. We speculate that mainly changes in settlement methods after the company's sales reform, an increase in acceptance notes will apparently affect cash inflows. Furthermore, the increase in the company's cash for purchasing goods and receiving labor payments, and the decrease in cash flow inflows and increased outflows comprehensively dragged down operating cash flow. Looking at the turnover ratio, 24H1's accounts receivable turnover ratio is 3.64, up from 23H1's 3.28, which is optimistic about the company's subsequent cash flow improvement.

Profit forecasting and valuation

Compared with the previous forecast, we comprehensively consider Newchem's pressure trend. Assuming that acyclovir tablets and vitamin D3 injection drug approval documents are confirmed, we expect EPS to be 0.69/0.85/1.04 yuan/share in 2024-2026 (0.68/0.84/1.04 yuan/share, respectively), and the closing price on September 3, 2024 corresponds to 17 times PE in 2024. We continue to be optimistic that the company's new API & formulation product development and declaration will pass the Yangfu factory Next, maintain a “buy” rating in the development space for steroidal APIs and formulation upgrades.

Risk warning

Risk of product sales falling short of expectations, risk of production safety accidents, risk of a sharp rise in raw material costs, etc.