Core views

24Q1-3 The revenue side of the company's main business declined slightly, and the profit side achieved rapid growth.

The API intermediates business is expected to continue the positive trend. While demand is strong and sales are increasing, production costs are reduced due to optimized API processes. Revenue from the formulation business is expected to be under pressure in the short term, increasing profitability through cost optimization. The company is positioned as a unified chemical and pharmaceutical industry platform under Sinopharm Group. The strategic positioning is clear, and high-quality development is solidly promoted.

Looking forward to the future, we think we are focusing on: 1) the steady improvement in the profit quality of API intermediates; 2) the stabilization of the formulation business and strength in potential fields; 3) the collaborative promotion of the Chinese pharmaceutical system is worth looking forward to, and we are optimistic about the long-term development of the company.

occurrences

The company released its report for the third quarter of 2024

On October 28, the company released the 2024 third quarter report. In Q1-3, the company achieved revenue of 8.593 billion yuan, -6.21%; net profit to mother 0.955 billion, +69.27% year over year; net profit after deducting non-return to mother 0.927 billion, +74.87% year over year.

24Q3 achieved revenue of 2.633 billion yuan in a single quarter, -3.10%; net profit to mother 0.236 billion, +7.79% year over year; net profit after deducting non-return to mother 0.244 billion, +17.14% year over year.

Brief review

Performance is in line with forecast expectations, and profit quality has improved markedly

24Q1-3 achieved revenue of 8.593 billion yuan, -6.21% year over year; net profit to mother of 0.955 billion, +69.27% year over year; net profit before deducting non-return to mother 9.0.7 billion, +74.87% year over year. 24Q3 achieved revenue of 2.633 billion yuan, -3.10% year over year; net profit to mother 0.236 billion, +7.79% year over year; net profit after deducting non-return to mother 0.244 billion, +17.14% year over year. The decline on the revenue side is mainly related to the impact on sales revenue of pharmaceutical products in the context of linked price reduction in collection and price linkage under the “four same” policy; the net profit side achieved rapid growth, mainly due to the company's strong demand for APIs and increased sales volume, while optimizing the API process led to a reduction in production costs, and the formulation sector promoted marketing model adjustment and transformation, which led to a significant drop in sales expenses. Q3 The growth rate in the single quarter declined somewhat compared to the first half of the year. We think it is mainly due to the lower base in the first half of last year, the increase in the base in the second half of the year, and the low season for infectious disease demand in the third quarter from the perspective of business pace. The results were in line with previously forecast expectations.

The API intermediates business is expected to continue the good trend: among the company's API intermediates, penicillins and macrolides are in strong market demand in 2024, while prices remain high. Referring to the performance of the first half of the year, sales of the company's ampicillin, amoxicillin, and clavulanic acid series products increased by 805.78%, 93.78%, and 33.95%, respectively; the volume and price of the macrolide API azithromycin increased sharply. Judging from the Q3 price performance, the overall price performance of penicillins, macrolides and cephalosporins showed a steady upward trend from month to month. At the same time, the company reduced procurement prices for some raw materials by strengthening strategic procurement and optimizing supplier channels; continued to promote process optimization and upgrading of key API products and reduce production costs. The above price and cost factors jointly contributed to a year-on-year increase of 10.35 pct in the gross margin of the company's 24Q1-3 pharmaceutical intermediates and APIs business segment.

The formulation business is expected to be under short-term revenue pressure, and cost optimization increases profitability: The company's formulation sector is mainly affected by the price reduction of the “four same” policy, and the 24H1 revenue scale is under pressure. We expect the Q3 revenue side of the company's formulation sector to be pressured in the short term under the current external environment. The company actively responds to industry trends, continues to promote the adjustment and transformation of marketing models, and carries out marketing management improvements. The 24Q1-3 sales expenses rate decreased by 6.97 percentage points year on year, and we expect the overall profitability of the formulation sector to further improve.

The strategic positioning within the group is clear, and the momentum of innovation drives industrial upgrading. The company belongs to Sinopharm Group and is positioned as a unified chemical and pharmaceutical industry platform under Sinopharm Group. Currently, the company has formed a specialized development pattern with unified strategy, concentrated resources, scale effects, and collaborative advantages in the upstream and downstream industrial chains. In terms of collaboration within Sinopharm Group, the company actively participated in the Sinopharm Group's “Family Family” development plan: 1) Continuously strengthen cooperation with Sinopharm Holdings, the leading commercial company within the Sinopharm Group, and strengthen linkage with the commercial sector within the Sinopharm Group through various methods such as online connection and participation in Sinopharm Group's interconnection; 2) Strengthen resource connections with Sinopharm Group's medical service sector to implement “industrial and medical collaboration”; 3) Participate in Sinopharm Group's integrated supply chain system to strengthen “industrial and industrial collaboration”. The effect of synergy and cohesion continues to show. In August '24, the company formulated the “2024 “Improving Quality, Efficiency and Reward” Action Plan. In terms of R&D and innovation, the company has invested in five major areas of strength in recent years: anti-infection, cardiovascular, anesthetic and psychiatric, metabolic and endocrine, anti-tumor and immune regulation. Up to 24H1, the company has passed a total of 100 consistent evaluations (including identification), of which 21 drug approvals have been obtained through independent research and development methods, and obtained 9 new product approval numbers through MA H transfer. In the future, the company will use Sinopharm Modern Research Institute as the innovator and various subsidiaries and cooperative platforms as collaborators, and it is expected that it will continue to promote industrial upgrading.

Profitability has improved markedly, and all expenses are well controlled. The company's 24Q1-3 gross profit margin was 39.69%, +0.81 pct year on year; net profit margin was 13.96%, +5.26 pct year on year; the operating quality was good, and profitability improved significantly. We think it was mainly due to 1) adjusting the product structure and increasing the share of high-margin variety structures; 2) APIs reduce production costs by improving process technology, strengthening integrated management, and large-scale production; 3) Continuously promoting cost reduction and cost control to boost management efficiency. From the perspective of cost control, the company's 24Q1-3 sales expense ratio was 11.28% (-6.97 pct), management expense ratio 6.48% (+0.45 pct), R&D expense ratio 4.84% (+0.73 pct), and financial expense ratio -0.78% (-0.22 pct). All expenses were well controlled, and sales expenses dropped significantly. 2.4 Q1 -3 The net cash flow from the company's operating activities was 2.026 billion yuan, +40.0% year over year. Mainly due to the increase in the cash ratio of the company's operating income during the reporting period, the cash flow from operating activities was good. As of 24Q3, the company had a monetary capital of 5.64 billion yuan and sufficient cash on hand, laying a solid foundation for subsequent R&D investment and business extension mergers and acquisitions. The rest of the financial indicators are generally normal.

Future outlook: 1) The profit quality of API intermediates has improved steadily: the net profit of the company's subsidiary Sinopharm Weiqida 23H1, 23H2, and 24H1 was 0.026 billion yuan, 0.153 billion yuan, and 430 million yuan respectively, with significant improvements over the previous month. 24Q3 maintains the prosperity of the company's main varieties and has good price performance. It is expected to steadily improve the profit quality of the company's API intermediates. At the same time, the company optimizes production costs through process technology improvements and management efficiency. It is expected that there is still room for improvement in the profit margin of the API intermediate sector in 2005; 2) The pharmaceutical business is stabilizing and gaining strength in potential areas: the company's formulation sector is pressured by external policy disturbances such as procurement and price reduction in the short term. We expect it to gradually stabilize this year. The company's formulation business is based on high-end and specialty chemical generic drugs, gradually increasing the proportion of improved new drugs and innovative drugs, forming a “combination of imitation” development situation. As the company continues to advance product layout and market development around treatment fields such as anesthesia, analgesia, and antidepressants, it will continue to strengthen potential fields in the future. 3) Collaborative promotion of the Sinopharm system: The company is positioned as a unified chemical and pharmaceutical industry platform under the Sinopharm Group, which has the advantage of being an industrial platform. Currently, the company is actively participating in Sinopharm Group's “Family Family” development plan, continuously strengthening cooperation with Sinopharm Group's internal commercial giant Sinopharm Holdings, strengthening resource connections with Sinopharm Group's medical service sector, and participating in the Group's industrial chain supply chain integration system. It is worth looking forward to future collaborative promotion and strategic integration within the group.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 116.32 billion yuan, 122.84 billion yuan, and 13.133 billion yuan, respectively, up -3.6%, 5.6%, and 6.9% year-on-year, respectively; net profit to mother will be 12.15, 14.07 billion yuan, and 1,707 billion yuan, respectively, up 75.6%, 15.8%, and 14.2% year-on-year, respectively. Equivalent EPS is 0.91 yuan/share, 1.05 yuan/share, and 1.2 yuan/share, respectively. The corresponding PE is 14X, 12.1X, and 10.6X, maintaining a “buy” rating.

Risk warning

Risk of price fluctuations of major products: The company's business includes antibiotic intermediates and APIs. Currently, prices of products such as penicillin intermediates and erythromycin thiocyanate have been rising in recent years. Significant price fluctuations in the future will affect the company's main business revenue growth.

Industry competition intensifies risks: Currently, the competitive pattern in the market where the company's main products are located is relatively stable. If prices rise further and more competitors join the market in the future, increased competition may reduce the company's profit level; in addition, if additional production capacity is supplied in international markets such as India, it may have an impact on the prices of the company's related varieties.

Industry policy risks: Currently, centralized procurement of national pharmaceuticals and medical insurance negotiations are gradually being normalized. If the company's main pharmaceutical products fail to win the bid in national collection, sales of the company's pharmaceutical products at public medical institution terminals may be restricted, which will adversely affect the company's domestic market share and business performance.

Risk of changes in overseas demand: A certain percentage of the company's current products and future product sales are used for export. A decline in overseas demand will adversely affect the company's performance.