Incident: The company released its 2024 three-quarter report. In the first three quarters of 2024, it achieved operating income of 0.594 billion yuan (YOY +9.17%), achieved net profit attributable to mother of 0.072 billion yuan (YOY -28.39%), and realized net profit without deduction of 0.062 billion yuan (YOY -27.42%), lower than our previous expectations.

The industry environment is changing, and performance is facing challenges. In the third quarter of '24, the company achieved operating income of 0.199 billion yuan (YOY +2.0%) and net profit to mother of 0.017 billion yuan (YOY -55.5%). The company's revenue and profit fell short of expectations. Mainly, the biomedical industry was affected by multiple factors, leading to phased supply and demand imbalances. The clinical R&D outsourcing industry faced multiple challenges in the short term, which had a negative impact on order prices. Meanwhile, the company received 0.375 million yuan in government grants in the first three quarters of 24, less than 10.65 million yuan in the same period last year. The company is speeding up the upgrading of enterprise informatization and strengthening core service capabilities, and is expected to further consolidate its leading position in the industry in subsequent business development.

Gross profit margin declined month-on-month, and personnel reserves increased. 24Q3's gross margin in a single quarter was 20.8%, down 6.52pp from the previous quarter. The company's gross margin has declined, mainly because business personnel have been reserved according to business needs, and operating costs have increased accordingly. As of 24Q3, the total number of employees in the company was 4,692, including nearly 4,500 business personnel. The net cash flow from 24Q3's operating activities decreased by 0.041 billion yuan to -0.014 billion yuan compared to the same period last year, mainly due to a year-on-year increase of 0.036 billion yuan to 0.171 billion yuan in employee remuneration payments. As of 24Q3, the company has undertaken more than 3,400 SMO projects, adding about 200 more projects compared to 24H1. Adequate staffing allows the company to cover more than 1,300 clinical trial institutions, and can respond quickly to customer needs after the industry recovers.

Profit forecast, valuation and rating: The company is a leading company on the SMO circuit. Due to increased competition in the industry and weak demand for biomedical research and development, the company lowered its 24-26 net profit forecast to 0.107/0.141/0.172 billion yuan (down 34.0%/27.1%/23.6%, respectively). The current stock price corresponds to PE 21/16/13 times. Considering that the current stock price has been drastically revised, the valuation is within a reasonable range, maintaining a “buy” rating.

Risk warning: Risk that R&D progress falls short of expectations; policy changes bring the risk of falling prices.