Key points of investment

Incident: The company released its 2024 three-quarter report. 2024Q1-3 achieved revenue of 1.252 billion yuan (+76.51%, same ratio in parentheses), net profit of 0.35 billion yuan (+281.90%), net profit not attributable to mother of 0.355 billion yuan (+301.43%); a single Q3 achieved revenue of 0.421 billion yuan (+36.31%), net profit to mother 0.123 billion yuan (+146.86%), deducted from non-return The net profit for mother was 0.125 billion yuan (+176.27%), and the performance slightly exceeded our expectations.

Gross margin increased further, and Q3 calculated more expenses for the period: on a quarterly basis, the company achieved a gross sales margin of 73.27%, an increase of 8.55 pcts year over year, and an increase of 5.91 pcts over the previous year; achieved a net sales margin of 28.27%, an increase of 11.91 pcts year over year, and a decrease of 6.88 pcts over the previous year. We expect the year-on-year increase in profit margins mainly due to the company's continued expansion of high-margin peptide APIs and an increase in sales share. We expect a month-on-month decline in net profit mainly due to: 1) Q2 confirmed more CDMO order revenue, leading to a high base; 2) demand declined slightly due to seasonal effects of oseltamivir in Q3. Q3 charges more expenses, sales expense ratio 5.83% (+1.29pct), management expense ratio 24.27% (+3.56pct), R&D expense ratio 19.42% (+4.53pct), financial expenses ratio 3.56% (+2.27pct). With the advancement of the company's ongoing research projects and the expansion of the company's size, the R&D cost rate and management cost ratio have increased.

Self-selected products are rapidly released, leading in peptide production capacity construction progress: the company currently has a production capacity of more than 1.5 tons. We expect the construction of 601 and 602 workshops from the end of 2024 to the first quarter of 2025, and the production capacity of polypeptide APIs will reach 11.6 tons by the end of 2025, the first in the country; on-hand order catalytic performance release: the company's peptide products are mainly sold to standardized markets for generic drug R&D and verification. We have signed a number of active ingredient and CDMO projects such as simeglutide injections, oral agents, and GLP-1 innovative drugs. Maintaining high growth is a major factor driving the company's performance.

Profit forecast and investment rating: Considering the continued expansion of the company's peptide API, demand for oseltamivir is expected to pick up in the fourth quarter. We raised the company's net profit to mother in 2024-2026 from 0.43/0.56/0.71 billion yuan to 0.45/0.56/0.71 billion yuan, corresponding to the current market capitalization P/E valuation to 32/25/20X. Based on the company 1) rapid release of peptide products, leading the country in technology+production capacity construction; 2) CDMO's large order delivery, the customized business is expected to grow rapidly; 3) the formulation project progresses steadily and maintains a “buy” rating.

Risk warning: risk that downstream demand for APIs falls short of expectations; risk of product price fluctuations; geopolitical risk.