Q2 Revenue returns to positive growth and profit margins improve

On August 30, the company announced the 2024 semi-annual results: 1H24 revenue/net profit/net profit after deducting non-net profit was 2.143/0.405/0.369 billion yuan (-7.0/-35.1/ -39.7% yoy), of which 2Q24 revenue/net profit to mother/ net profit after deducted non-net profit were 1.138/0.228/0.197 billion yuan (+14.3/-22.0/ -29.8% yoy), and the increase in Q2 profit margin was mainly due to improved gross margin (Q1/Q2) (Gross margin was 38.5/ 41.8%, respectively). We are optimistic about the company's high formulation growth and biopharmaceutical layout. We expect net profit to be 0.863/1.21/1.534 billion yuan in 2024-26E, corresponding to EPS of 0.53/0.75/0.95 yuan. We gave the company 29.32x PE in 2024 (20% premium compared to comparable companies, mainly due to the company's relatively small share of revenue under pressure from APIs), adjusted the target price to 15.67 yuan (previous value 17.57 yuan), and maintained the “purchase”.

Formulations: Steady growth continues, with further improvement in the second half of the year

1H24's formulation revenue is 1.548 billion yuan (including 1.148 billion yuan overseas and 0.399 billion yuan domestic), which we estimate is still the company's main growth driver. Overseas markets: 1) The US market continues to grow strongly, and Meitheal achieved revenue of 0.949 billion yuan (+18% yoy); 2) As of 1H24, it had accumulated 100 overseas approvals, 3 more than at the end of 2023, including palonosetron, etibatide, etc.; we expect the company to launch about 20 products in the US this year, most of which will be launched on H2. In addition, major products such as liraglutide and white purple are expected to be launched one after another. Domestic market: 1) Considering the timing of collection execution, we estimate that the pressure on the company's year-on-year growth rate from winning the bid for nadroparin and enoxaparin injections may have been absorbed; 2) As of 1H24, 33 domestic approvals have been made, with 5 additional approvals since the end of 2023, including reganosene, azacitidine, etc.

Biopharmaceuticals: both internally and externally, a new growth curve is poised to begin

We expect biosimilars to gradually grow into the company's growth focus, further opening the ceiling: 1) The company has set up a biomedical division to further expand its biopharmaceutical capabilities. 2) The company and Tonghua Dongbao have reached cooperation on the three insulin injections of glycine, mendong, and laipong in the US market. We expect the related products to be approved for marketing in 2026; using this as a result, the company is expected to promote the internationalization of more domestic biosimilars in the future. 3) The company purchased its Yusimry (adalimumab biosimilar) US approval and related assets at 6M24 for 40 million dollars from Coherus. Since Yusimry has been approved for listing, we expect it to be realized as a revenue and profit growth point for the company in the short term.

APIs: Go to battle lightly, volume and price may be repaired

1H24's revenue from heparin APIs is 0.533 billion yuan, accounting for 24.85%. We expect it to drop further to less than 20% this year; the gross profit margin is 29.0%. We estimate that the Q2 gross margin has been repaired, and the risk of subsequent impairment is limited. Net cash flow from operating activities remained steady and positive, at 0.201/0.405 billion yuan in 1Q/2Q24, respectively.

Risk warning: uncontrolled decline in the price of heparin APIs; overseas sales fall short of expectations; exchange risk.