Incident: The company released its 2024 three-quarter report. In the first three quarters, it achieved operating income of 5.068 billion yuan (YOY -10.3%), achieved net profit due to mother of 0.813 billion yuan (YOY -56.7%), and realized net profit of 0.892 billion yuan (YOY -25.6%) after deducting non-return to mother, which is lower than our previous expectations.

Comment:

Gross margins are under pressure, and earnings from changes in fair value have declined. In the third quarter of 2024, the company achieved operating income of 1.709 billion yuan (YOY -11.87%), realized net profit attributable to mother 0.321 billion yuan (YOY -34.74%), and realized net profit deducted from non-mother 0.252 billion yuan (YOY -37.8%). The profit side of the 24Q3 company declined rapidly year-on-year, mainly due to gross margin falling 3.89pp to 37.28% compared to the same period last year, a decrease of 0.117 billion yuan in fair value change earnings compared to the same period last year, and an increase of 0.065 billion yuan in financial expenses compared to the same period last year.

Orders improved in the first half of the year, waiting for the industry to pick up. In 24H1, the company's new orders increased rapidly year on year. Among them, new orders for field management business increased by 34% year on year, and the growth trend was strong. Due to increased competition in the domestic industry, the average price of the company's orders fell, and revenue and gross margin declined compared to the same period last year. However, by actively expanding overseas business and establishing overseas teams, the company has further strengthened its leading clinical CRO position in China. We expect that as the US enters a cycle of interest rate cuts and a series of stimulus policies introduced by the Chinese government, the overall biomedical investment and financing environment will improve, and the clinical CRO industry is expected to bottom up, supporting the company's subsequent performance.

Profit forecasting, valuation and rating: The company is the leading clinical CRO in China. Due to the decline in the company's gross margin and fair value change, the domestic biomedical industry's investment and financing have not yet recovered and order execution prices have declined. The company's net profit for 24-26 was reduced to 1.232/1.663/2.156 billion yuan (45.7%/36.0%/33.0%, respectively), corresponding to 24-26 PE of 44/33/25 times. Considering that the current valuation is at a higher level compared to peers, it was downgraded to a “gain” rating.

Risk warning: Global investment in new drug research and development falls short of expectations; investment returns fluctuate.