Incident: On October 21, Kain Technology released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 1.011 billion yuan, +0.82% year over year; net profit to mother of 0.108 billion yuan, +19.74% year over year. Looking at the third quarter of a single quarter, the company achieved operating income of 0.414 billion yuan, -4.51% year-on-year, and +7.85% month-on-month; realized net profit to mother of 65.66 million yuan, +26.53% year-on-year, and +224.13% month-on-month.

The marketing application for Pai Probiotic's chronic hepatitis B indications was accepted. The innovative biological product developed by the company is a recombinant interferon alpha-2 injection (probiotic) modified by PEG. Among them, recombinant interferon is obtained by sequence-homologous comparison of more than ten natural α-interferon subtypes, analysis and integration according to the highest principles of homologous sequence. It has higher activity than ordinary alpha interferons, has a long half-life, is suitable for administration once a week, and has good convenience. It has both antiviral and immunomodulatory effects, and is one of the drugs that pursue clinical cure for chronic viral hepatitis B. The phase III clinical study of cultivating interferon alpha-2 injection carried out by the company is a multi-center, randomized, double-blind, placebo-controlled clinical trial to evaluate the efficacy and safety of cultivating interferon alpha-2 injections in the treatment of people infected with chronic HBV in the low replication phase. On September 30, 2024, the company issued an announcement that the marketing license application for interferon alpha-2 injection (Pai Probiotic) was accepted by the State Drug Administration. The proposed indication is combined with propofol fumarate tenofovir tablets (TAF) for the treatment of predominant groups with chronic hepatitis B (HBV) in adults. We expect that interferon-integrated chronic hepatitis B indications will be approved for marketing in 2025, bringing an increase in the company's performance.

The sales expense ratio continues to improve, and operating efficiency and net profit margin continue to improve. The company's R&D investment in the first three quarters of the third quarter of 2024 was 48.76%, a year-on-year decrease of 7.43pp. The company's sales expense ratio has continued to improve in recent years. The company's sales expense ratio was 61.72% in 2022, dropped to 56.19% in 2023, the company's sales expenses fell to 52.35% in the first half of 2024, and further fell to 48.76% in the first three quarters of 2024. The continuous improvement in the sales expense ratio reflects the improvement in the company's operating efficiency, and also brings about a continuous increase in the company's net interest rate. The company's net interest rate in 2022 was 6.95%, and the net return to mother interest rate was 7.19%. In 2023, the company's net interest rate and net return to mother margin increased to 9.72% and 8.25%, respectively. The company's net interest rate and net profit margin increased further to 12.50% and 10.69% in the first three quarters of 2024.

Continue to increase investment in R&D and accelerate R&D pipelines. In the third quarter of 2024, the company invested 46.81 million yuan in R&D, +53.91% year-on-year, accounting for 11.31% of revenue, up 4.30pp; in the first three quarters of 2024, the company invested 0.117 billion yuan in R&D, +35.59%, accounting for 11.61% of revenue, up 2.97pp year-on-year.

In the first three quarters of 2024, the company's R&D expenses were 0.104 billion yuan, +52.54% year-on-year. The R&D expenditure rate reached 10.29%, an increase of 3.49pp over the previous year.

Investment advice: We expect the company's revenue for 2024/2025/2026 to be 1.515 billion yuan/2.005 billion/ 2.622 billion yuan, and net profit to mother will be 0.141 billion yuan/0.173 billion/ 0.221 billion yuan respectively; corresponding PE will be 35 times, 29 times /22 times, respectively, maintaining the “recommended” rating.

Risk warning: Risk of falling product prices and market share due to interferon collection, risk of sales falling short of expectations, risk of R&D data and listing falling short of expectations, increased risk of market competition, health insurance and regulatory policy risks, etc.