Description of the event

On July 31, the company released its 2024 semi-annual report, 2024 H1, with revenue of 0.199 billion yuan (+14.4%), net profit due to mother 0.022 billion yuan (+8.1%), deducted non-net profit of 0.019 billion yuan (+106.6%), and cash flow from operating activities of 0.026 billion yuan (+56.0%). The difference in growth rate before and after deduction was mainly due to a reduction in government subsidies received by the company in the first half of the year.

Incident reviews

Continued investment in research and development of formulation varieties, and production capacity construction of peptide APIs is being promoted. The company is a leading domestic polypeptide formulation, API, and CDMO company. In 2024, H1, the company applied for registration of 3 R&D products, and 18 research projects. The company continued to increase R&D investment. The R&D expenses for the first half of 2024 were 0.024 billion yuan (+80.9%), due to increased investment in octreotide acetate microspheres, simeglutide, salmon calcitonin pilot tests, and KJMRT-YF001 (cyclic peptide-113). The main construction of the IPO fund-raising project with an annual output of 395 kg of peptide APIs has been completed. Trial production is expected by the end of 2024, and construction of 106, 107, and 108 API workshops is progressing in an orderly manner.

Domestic procurement of atosiban and somatostatin implemented rapid release, and continued expansion of varieties such as posaconazole and medical and aesthetic peptides. The company's peptides are distributed in the fields of digestion, immunity, antitumor, diabetes, obstetrics, medicine and aesthetics.

In 2024, H1's formulation revenue was 0.095 billion yuan (+48.3%). Domestic procurement of atosiban and somatostatin was carried out, and the amount collected and released led to an increase in formulation sales. 2024H1, posaconazole was approved, and Ganirec declared production. KJMRT-YF001 (cyclic peptide-113) can be applied to various soothing and whitening cosmetics in the toxicology research stage, bringing new growth points to the company.

Laying out peptide APIs in the field of multiple diseases, increasing demand for GLP-1 APIs is driving growth. 2024H1, API revenue is 0.057 billion yuan (+11.2%). Cetrorelix, posaconazole, and bevibatide APIs have been approved, and the company already has 19 types of polypeptide raw materials. Production approvals or activation records have been obtained for 14 types of polypeptide APIs in China, and 10 varieties such as bivalirudine, etibatide, and liraglutide have obtained US DMF registration abroad. 2024H1, overseas sales of APIs increased by 97.51% over the same period last year. As overseas demand for GLP-1 APIs increases, the company's API business is expected to continue to benefit.

Investment advice

The company is a pharmaceutical company with a complete layout of peptide preparations and APIs, and is expected to benefit from the expansion of the polypeptide formulation and API market brought about by the expiration of original peptide drugs such as GLP-1. The company's peptide APIs and domestic formulation business are expected to continue to grow. We expect the revenue for 2024-2026 to be 0.568/0.704/0.854 billion yuan, up 30.6%/24.0%/21.2% year on year; net profit to mother will be 0.101/0.125/0.153 billion yuan respectively, up 42.9%/24.7%/22.3% year on year, covering the first time, giving a “buy-B” rating.

Risk warning

Risk of R&D failure: There is a risk that the clinical trial results of the products being developed by the company do not meet expectations, the research results do not meet the requirements, etc., resulting in the product not being approved by the drug administration.

Risk of failure to pass the consistency evaluation: Generic drugs, including essential drug varieties, approved by the company for marketing before the implementation of the new drug registration classification should complete the consistency evaluation within 3 years after the first developed product review passes the consistency evaluation. Otherwise, they may lose their competitive advantage in the new round of pharmaceutical reform, and there is a risk that they cannot or will not pass the consistency evaluation within the period.

Financial risk: Recovery risk of accounts receivable: As the company's operating income continues to grow, the absolute amount of the company's accounts receivable may increase further. If the future market environment or credit conditions of major customers change adversely, the company may face the risk that accounts receivable cannot be recovered, which will adversely affect the company's operating performance.

Risk of exchange rate fluctuations: Some of the company's customers are overseas, and some raw materials are also purchased overseas. Overseas sales or purchases use the US dollar as the main settlement currency. If the exchange rate between the company's accounting currency and the US dollar, the settlement currency is not conducive to the company's exchange losses due to drastic changes, it will adversely affect the company's operating performance.

Industry risk: The country's centralized procurement policy has caused formulations to face the risk of a sharp drop in price and gross margin: the company's octreotide, atosiban, eptibatide, and thymus method have been included in the “Catalogue of Drugs Marketed in China”; atosiban, octreotide, somatostatin, and thymus method have passed the consistency evaluation. The company's octreotide acetate, atosiban acetate, and injectable somatostatin were included in the national procurement and won the bid. As more provinces include the company's pharmaceutical products in the local volume procurement catalogue, it will lead to a sharp drop in the price and gross margin of the company's formulation products. There is a risk that the price and gross margin of the company's formulation products will drop sharply in the next few years.

Macroenvironmental risks: International trade frictions have continued in recent years, and the global economy is facing downward pressure.

If the global macroeconomic climate continues to decline in the future, it will adversely affect the company's operating conditions, which in turn will affect the company's profitability. If the macroeconomy continues to hover in a weak cycle, it will inevitably adversely affect pharmaceutical manufacturers, thereby increasing industry fluctuations.