The company's 2024 three-quarter report:

The first three quarters of 2024 achieved operating income of 9.29 billion yuan, up 9.30% year on year; net profit to mother was 0.87 billion yuan, up 2.15% year on year; net profit after deduction was 0.831 billion yuan, up 0.40% year on year. Gross profit margin 24.23% (YoY -2.55pp), net profit margin 9.36% (YoY -0.66pp).

In the third quarter of the year 2024, revenue was 2.862 billion yuan, up 12.41% year on year; net profit to mother was 0.245 billion yuan, a decrease of 2.19% year on year; net profit after deducting non-return to mother was 0.229 billion yuan, a decrease of 1.75% year on year.

Gross profit margin 23.18% (YoY -4.02pp), net profit margin 8.55% (YoY -1.28pp).

Exchange fluctuations affect part of profits, and fee rate control is good. According to the company's announcement, the exchange loss from January to September '24 was about 7 million yuan, and the exchange gain for the same period last year was about 22 million yuan, which had an adverse impact of about 29 million yuan over the previous year. In the first three quarters of 24, the company's sales/management/finance/R&D expense ratios were 4.30%/3.92%/-0.15%/5.03%, respectively, -0.76pp/-0.29pp/+0.89pp/-0.66pp, respectively.

With the exception of financial expenses, which were affected by exchange rate fluctuations, all other expense rates declined year over year.

API sector: The market share and gross margin of core varieties have been rising steadily, and the number of new product projects has increased.

Revenue for the first three quarters of 24 was 6.903 billion yuan, up 15.31% year on year; gross profit was 1.077 billion yuan, down 0.93% year on year; gross profit margin was 15.60%, down 2.56 pp year on year, mainly due to high gross margin for the same period last year. The company has greatly increased the number of API projects. The company expects to increase the number of API DMFs by 30-50 within 3-5 years, thereby driving the continuous growth of the API business.

CDMO sector: The number of projects is growing rapidly, and there is plenty of momentum for subsequent growth. Revenue for the first three quarters of 24 was 1.42 billion yuan, down 11.40% year on year; gross profit was 0.58 billion yuan, down 19.61% year on year; gross profit margin was 40.85%, down 4.18pp year on year. The decline in gross margin was mainly due to faster growth in R&D projects and more deliveries. After deducting the impact of special orders in the first three quarters, sales and gross profit of the CDMO business maintained steady growth. The company expects gross margin to stabilize between 35% and 45% as the project gradually progresses to the commercialization stage.

The rapid increase in the number of CDMO projects is expected to gradually be realized: the company quoted 1,198 projects in the first three quarters, an increase of 85% over the previous year; 948 ongoing projects, an increase of 47% over the previous year. Among them, there were 344 commercialization projects, up 33% year on year; (including 253 human drug projects, 47 veterinary drug projects, 44 other projects); 604 R&D projects, up 57% year on year. There are 113 API projects in total, an increase of 51% over the previous year; of these, 18 have entered production and commercialization, 16 are in the verification stage, and 79 API projects are in the R&D stage. By the end of the reporting period, the company had signed confidentiality agreements with 550 innovative pharmaceutical companies. According to the company's announcement, as the number of projects increases, it will take 1-2 years to fulfill, and we are optimistic about the potential for subsequent development.

Formulation sector: Gross margin has increased dramatically, and the number of varieties is increasing dramatically. Revenue for the first three quarters of 24 was 0.95 billion yuan, up 8.62% year on year; gross profit was 0.591 billion yuan, up 27.97% year on year; gross profit margin increased by nearly 10 pp year on year. The gross margin increase was adjusted, and the sales model for some pharmaceutical products was adjusted. At the same time, production efficiency was greatly improved, comprehensive costs dropped significantly, and gross profit growth was higher than sales revenue growth. The company continues to increase investment in formulation research and development. Currently, more than 25 formulation projects are newly developed every year, and 15 formulation project verification has been completed in the first three quarters of this year.

Profit forecasting and investment ratings: The company's revenue side is growing steadily. The profit side is disrupted by factors such as exchange in the short term, and the three major businesses continue to develop new growth forces. In August 2024, the company announced its 2030 development strategy — “Refining raw materials, strengthening CDMO, making good pharmaceuticals, and expanding medicine and beauty”. On the basis of the three cornerstone businesses of APIs, CDMO, and formulations, the company focuses on the middle and upper reaches of the high diving circuit, leveraging collaborative R&D and manufacturing capabilities to expand the medical and aesthetic cosmetic ingredients business, and is optimistic about the company's continued development. We expect the company's net profit to be 1.17/1.34/1.56 billion yuan in 2024-2026, with a year-on-year growth rate of 10%/15%/17%, corresponding PE 16/14/12 times, maintaining a “highly recommended” investment rating.

Risk warning: risks such as changes in industry policies, drug development registration, environmental protection and safety, increased market competition, and geopolitics.