Key points of investment

Net profit increased significantly, and gross margin continued to rise. In the first three quarters of 2024, the company achieved operating income of 1.208 billion yuan (-17.62%), net profit due to mother 0.31 billion yuan (+56.47%), and net profit not attributable to mother of 0.228 billion yuan (+37.66%). Among them, Q3 quarterly revenue was 0.352 billion yuan (-13.97%), net profit due to mother 0.127 billion yuan (+60.84%), and net profit not attributable to mother was 0.049 billion yuan (-9.80%). During the reporting period, the decline on the revenue side was mainly due to a year-on-year decline in the export price of heparin APIs. The net profit to mother exceeded expectations mainly due to an increase in the company's gross profit level and the withdrawal of 85 million yuan and the settlement of Jianyuan Trust.

The company's gross margin for 2023Q4-2024Q3 was 44.65%/53.14%/52.18%/57.22%, respectively. Among them, 2024q3 gross margin increased 11.37 pct year-on-year, and the company's gross sales margin continued to increase.

It is proposed to acquire Fangyuan Pharmaceutical to broaden the company's product pipeline. The company announced that it has signed a “Investment Agreement on the Reorganization of Changzhou Fangyuan Pharmaceutical Co., Ltd.” with the bankruptcy administrator of Changzhou Fangyuan Pharmaceutical Co., Ltd., and plans to acquire all of Fangyuan Pharmaceutical's shares through an investment of 0.39 billion yuan to obtain the restructuring assets corresponding to this equity. The core product of Fangyuan Pharmaceutical is etimicin sulfate, a new generation of semi-synthetic aminoglycoside antibiotics. It is a new type of drug in the country with independent intellectual property rights. Currently, only 2 domestic manufacturers have approved etymicin sulfate small-volume injections, Fangyuan Pharmaceutical and Wuxi Jiyu Shanhe Pharmaceutical, which have sufficient market space and a good competitive pattern. According to data from Yao Rongyun, the national hospital sales scale in 2023 was 0.805 billion yuan, of which Fangyuan Pharmaceutical's sales volume was 0.203 billion yuan, with a market share of 25.16%. After the acquisition of Fangyuan Pharmaceutical, the company is expected to use its sales advantages to further develop an empty market, increase market share, and enhance the company's performance.

The innovation pipeline is progressing in an orderly manner. In 2024Q3, the company spent 0.029 billion yuan on R&D (+138.59%). R&D expenditure increased significantly year-on-year, and the innovation pipeline progressed rapidly. The QHRD107 clinical phase II has been successfully expanded, the oral dosage form is safe, and the domestic target is leading progress. It is expected that phased progress will be achieved by the end of 2024. QHRD106 (Indication is acute ischemic stroke). Phase II clinical protocol discussions have been conducted and approved by CDE without reservation. QHRD110 (CDK4/6 inhibitor) differentiates the layout of glioma indications. Phase I clinical trials have been completed in Australia, and clinical bridging tests are being carried out domestically. QHRD211 (indicated for slow growth in children lacking growth hormone) has also completed phase I clinical trials and entered phase II clinical trials.

Investment advice: Without considering the impact of the acquisition, we expect the company's 2024-2026 revenue to be 2.05/2.422/2.732 billion yuan, respectively, and net profit to mother of 0.322/0.393/0.461 billion yuan respectively (original forecast 0.322/0.394/0.462 billion yuan), corresponding EPS of 0.25/0.31/0.36 yuan, and corresponding PE of 25.66/21.00/17.90 respectively, maintaining a “buy” rating.

Risk warning: risk of heparin price fluctuations; risk of drug sales falling short of expectations; risk of R&D progress falling short of expectations.