Core views

The company's 2024Q1-3 business remained steady, and the performance was in line with expectations. The pharmaceutical industry's profit performance was impressive, and innovation and transformation were gradually realized. Domestic medicine and aesthetics have maintained steady growth, and overseas medicine and aesthetics have been disrupted. Gongwei focuses on four major fields, and the diversified growth rate of the business is impressive. The pharmaceutical business is back on a growth trajectory. The company's profit level has increased, and innovation investment losses have narrowed. Outlook 2024:

1) Innovation and transformation are gradually being realized, and many innovative products are expected to be launched; clinical progress on important varieties in the GLP-1 field continues to advance; 2) The rapid enrichment of medical and aesthetic pipelines since 25 years has brought about profit flexibility; 3) the industrial and micro sector has ushered in multiple catalysis.

occurrences

The company released its report for the third quarter of 2024

On October 24, the company released the 2024 third quarter report. In Q1-3, revenue was 31.478 billion, +3.56% year over year; net profit to mother was 2.562 billion, +17.05% year over year; net profit after deducting non-return to mother was 2.482 billion, +14.90% year over year.

24Q3 achieved revenue of 10.513 billion yuan in a single quarter, +5.03% year over year; net profit to mother of 0.866 billion, +14.71% year over year; net profit without return to mother of 0.857 billion, +16.93% year over year.

Brief review

Performance is in line with expectations, industrial growth is steady, and overseas medical and aesthetic medicine is disrupted

Steady operating performance is in line with expectations. The company achieved revenue of 31.478 billion in Q1-3 in '24, +3.56% YoY; net profit to mother of 2.562 billion, +17.05% YoY; net profit after deducting non-attributable net profit of 2.482 billion, +14.90% YoY. 24Q3 achieved revenue of 10.513 billion yuan in a single quarter, +5.03% year over year; net profit to mother of 0.866 billion, +14.71% year over year; net profit without return to mother of 0.857 billion, +16.93% year over year. Operations were steady in 2024Q1-3, and the slowdown in revenue side growth was mainly affected by the commercial sector. Overall, the profit side maintained a good level of growth in the Q3 quarter, mainly benefiting from the steady performance of the industrial sector leading to profit growth, and the performance was in line with expectations. Meanwhile, the growth rate of the commercial sector has returned to a normal growth trajectory (Q1 down 1.86% year on year, Q2 up 0.71% year on year, and Q3 up 5.4% year on year), and the revenue side is also expected to accelerate throughout the year.

The pharmaceutical industry's profit performance was impressive, and innovation and transformation were gradually realized. In 2024Q1-3, the pharmaceutical industry achieved revenue of 9.941 billion yuan, a year-on-year increase of 10.53%; net profit to mother was 2.14 billion yuan, an increase of 14.49% over the previous year. In Q3, the pharmaceutical industry achieved revenue of 3.243 billion yuan in a single quarter, up 10.32% year on year; net profit to mother was 0.755 billion yuan, up 20.44% year on year. The company's innovative layout focuses on the three major fields of endocrinology, self-immunity, and anti-cancer. Currently, there are more than 70 innovation pipelines. The company's innovation and transformation progress has gradually begun to be realized. Some of the products that have previously entered the marketing phase include: usinumab biosimilar drugs (marketing application accepted in August 2023); ELAHERE (FRα A DC, marketing application accepted in October 2023); ARCALYST (marketing applications for recombinant fusion protein, CAPS indications and recurrent pericarditis indications were accepted in November 23 and March 2024, respectively); mehuatinib (NSCLC, sensitive mutation, marketing application accepted in May 24) accepted). We believe that in the future, many excellent product pipelines will be approved one after another from the end of 24 to 25, driving the steady growth of the company's pharmaceutical industry sector.

Domestic medicine and aesthetics have maintained steady growth, and overseas medicine and aesthetics have been disrupted. The medical and aesthetic sector of 2024Q1-3 achieved a total revenue of 1.909 billion yuan, an increase of 1.90% over the previous year. By region, the domestic medical and aesthetic subsidiary Hinkley Aesthetics achieved revenue of 0.909 billion yuan, an increase of 10.31% over the previous year. The strong product strength of Yi Yanshi, the core product of domestic medicine and aesthetics, has brought continuous volume. The market for energy source equipment has further improved the domestic medical and aesthetic layout, and has maintained steady growth on the basis of more than 1 billion in domestic medical and aesthetic revenue in 23 years. Sinclair 2024Q1-3 in the UK, a wholly-owned subsidiary of overseas medical and aesthetic medicine, achieved revenue of about 0.776 billion yuan, a year-on-year decrease of 20.30%. Overseas medical and aesthetic medicine is mainly affected by weak global economic growth. Furthermore, phased demand for the EBD business may fluctuate. We expect the overseas medical and aesthetic business to gradually stabilize in the future as market demand recovers and market development continues to advance.

Gongwei focuses on four major fields, and the diversified growth rate of the business is impressive. The 2024Q1-3 industrial and micro sector achieved revenue of 0.443 billion yuan, an increase of 30.17% year over year. Looking at the layout, the core layout of the industrial and micro business is divided into four major fields: xRNA, specialty APIs & intermediates, health & biomaterials, and animal health care. 24Q1-3's industrial and micro business is progressing rapidly. The Yichang Industrial Base (Phase I) project of Meiqi Health, a subsidiary of the Health Division, has completed construction and obtained a production license, switched to normal operation, and obtained multiple certifications in the first half of the year. We expect 24H2 to make a good incremental contribution. In terms of specialty APIs, ADC raw materials have completed a series of product layouts, all mainstream toxin varieties have completed US DMF registration numbers, and the peptide business has completed the overall layout. Follow-up attention is being paid to international market development.

The pharmaceutical business is back on a growth trajectory. 2024Q1-3's pharmaceutical business achieved a total revenue of 20.571 billion yuan, an increase of 1.38% over the previous year, and a cumulative net profit of 0.323 billion yuan, an increase of 2.09% over the previous year. In Q3, pharmaceutical business revenue in a single quarter was 7.02 billion, +5.4% year-on-year. The short-term growth rate of the pharmaceutical business sector since the second half of '23 has been slightly disturbed by the industry. 24Q2 has resumed positive year-on-year growth, and the 24Q3 growth rate has clearly rebounded. Judging from the company's pharmaceutical business sector layout, the traditional business continues to be cultivated in Zhejiang, and the innovative business focuses on continuous cultivation in fields such as product agency, tripartite logistics, pharmaceutical e-commerce, and specialty health. It is expected that the 24H2 commercial sector will resume healthy growth.

Profit levels have increased, and innovation investment losses have narrowed. 2024Q1-3's gross profit margin was 32.55%, up 0.69 percentage points from the same period last year; the net profit margin was 8.14%, up 0.92 percentage points from the same period last year. Sales expense ratio 15.02% (-0.32 pct), management expense ratio 3.75% (+0.11 pct), R&D expense ratio 3.01% (+0.24 pct), financial cost ratio 0.12% (-0.09 pct). The level of gross margin increased, the overall cost ratio remained stable, the sales expense ratio decreased, and R&D investment intensity remained high. At the same time, the company has continued to increase investment in innovative pharmaceuticals and other fields in recent years. 2024Q1-3's investment income for joint ventures and joint ventures was -0.055 billion yuan, and -0.145 billion yuan in the same period in '23. Losses narrowed sharply year on year. Subsequently, as the subsidiary's own profitability increases and potential external licensing revenue is realized, the impact of participating R&D institutions on the company's profits is expected to gradually turn positive. 2024Q1-3 Cash flow from operating activities

The net amount was 2.506 billion yuan, up 11.4% year on year. The net cash flow from operating activities in Q3 was 0.231 billion yuan, up 1.3% year on year. Operating cash flow continued to improve, and operating operations remained at a high level. The rest of the financial indicators are generally normal.

Future outlook: 1) Progress in innovation and transformation: The company has continuously enriched its innovative drug R&D pipeline layout in recent years, focusing on the three fields of endocrinology, self-immunity, and anti-cancer. BCMA CAR-T was launched in March 24, looking ahead to 2024. The company's FRα-ADC (ELAHERE), usinumab (HDM3001), ARCALYST, and mehuatinib are expected to be launched; at the same time, in the GLP-1 field, simeglutide, HDM1002, HDM1005, Clinical progress on important varieties such as DR10624 is expected to continue. In August 2024, the company's HDM1002 research results were published in the “Journal of Clinical Chemistry”, and in September 2024, the company gave an oral report on the preclinical research results of the GLP-1/GIP dual-target product HDM1005 at the European Society for Diabetes Research Annual Meeting (EASD 2024). It is recommended to pay attention to the progress of subsequent data disclosure and the possibility of external cooperation.

2) The medical and aesthetic pipeline has been rapidly rich since 25 years: the company's domestic medical and aesthetic growth has been good, and overseas medical and aesthetic medicine has fluctuated in the short term. In the future, with global macroeconomic improvements, market demand recovery, and the company's market development continues to advance, the overseas medical and aesthetic business is expected to gradually stabilize. On the pipeline side, the recombinant botulinum toxin phase III clinical trial in cooperation between the company and Yuyan Pharmaceutical was fully successful in September 2024. Subsequent companies are expected to gradually launch products such as E-Yansi M, MaiLi hyaluronic acid, and recombinant botulinum toxin starting in '25, enriching the company's medical and aesthetic product pipeline.

3) Multiple catalysis in the industrial and micro sector: Meiqi Health was put into operation in 23Q4, and the incremental contribution is expected to be significant during the year; the environmental protection business layout is a blue ocean circuit, and variety introduction and brand cultivation will help the C-side develop; the peptide business in the specialty APIs & intermediates sector has completed its layout, focusing on international market expansion.

Profit forecasting and investment ratings

We forecast that in 2024-2026, the company's revenue will be 42,983 billion yuan, 473 and 52 billion yuan, respectively, up 5.8%, 10% and 9.9% year on year; net profit to mother will be 33.49, 39.53, and 4.448 billion yuan, respectively, up 18%, and 12.5% year on year. Equivalent EPS is 1.91 yuan/share, 2.25 yuan/share, and 2.54 yuan/share, respectively. The corresponding PE is 17.9X, 15.2X, and 13.5X, maintaining a “buy” rating.

Risk warning

Risk of drug development failure and risk of evaluation progress falling short of expectations: There are many new drug research projects related to the pharmaceutical industry sector of the company's core business. Innovative drug development itself is uncertain. Drug development failure and review uncertainty may cause the return on R&D investment to fall short of expectations.

Health insurance fee control and industry competition are increasing risks: Currently, centralized procurement of national drugs and medical insurance negotiations are gradually being normalized. Currently, the company still has some generic drug types that have not been included in the collection. In the future, the price drop of related varieties after being collected may have a certain impact on the revenue of this variety.

Industrial microbiological products are not progressing as well as anticipated risks;

the risk of rising raw material costs;

There is a risk that adverse medical events may impact the industry beyond expectations.