The company announced the three-quarter report on October 30:1-9M24 revenue/net profit to mother/net profit after deducting non-net profit was 3.088/0.606/0.548 billion yuan (-1.72/-27.82/ -33.41% yoy), of which 3Q24 revenue/net profit to mother/ net profit after deducting non-net profit was 0.945/0.201/0.18 billion yuan (+12.79/-6.54/ -15.29% yoy), respectively. We are optimistic that the company's APIs and domestic formulations will stabilize, and that non-heparin preparations and biosimilar drugs will be saved to maintain a “buy” rating.

Profit performance recovered steadily, and foreign exchange dragged down Q3 profits

This year, the gross margin of Q1/Q2/Q3 companies was 38.49/41.77/ 44.07%, respectively, and the net margin was 17.64/20.01/ 21.24%, respectively. Profitability is recovering quarterly. We estimate that the share of revenue from the pharmaceutical business with high gross margin has increased mainly due to high gross margin. The financial expense ratio increased to 6.00% in Q3 this year (Q1/Q20.56/ 0.93% this year, 2.46% in Q3 last year). We estimate that it is mainly due to large exchange rate fluctuations and an increase in the company's exchange losses. Net cash flow from operating activities in Q3 this year was $0.449 billion, which has been positive for 7 consecutive quarters.

Formulations: Steady growth continues, and exports of non-heparin preparations are gaining strength

We estimate that the formulation business remains the company's main growth driver today. 1) From an overseas perspective, the US market continues to grow strongly. 1H24 Meitheal achieved revenue of 0.949 billion yuan (+18% yoy). Our estimated growth was mainly driven by non-heparin preparations; Q3 added 2 new overseas approvals (ropivacaine and fluorouracil). Currently, we have accumulated 100+ overseas approvals. We expect the number of approvals to continue to grow rapidly. 2) Domestically, the year-on-year pressure of Enox and nadroparin collection execution has basically been digested, and heparin has not yet been included in the 10-batch collection catalogue, and the collection pressure is gradually clear; the Q3 company added 2 new domestic approvals (azacitidine and oxaliplatin).

Biosimilar drugs: the next stage of growth engines, white purple, insulin, etc. are entering the cash out period, and athletes are working both internally and externally to build a biosimilar product matrix: 1) 7M24 purchased approval for adalimumab antibiotics and has now started sales; 2) Albumin paclitaxel is expected to be approved in 2025. The competitive pattern is good, and terminal demand is rigid. We expect to contribute 0.293/0.402 billion in revenue in 25/26, respectively; 3) Liralurin and insulin are also expected to be launched successively in 2025-2026. We expect the biosimilar business to provide a substantial increase in the company's revenue and profits. The revenue is expected to reach 0.647/1.617 billion yuan in 2025-2026, further improving the company's growth curve.

Profit forecasting and valuation

We predict that the company's net profit for 2024-2026 will be 0.85/1.231/1.615 billion yuan (previous value 0.863/1.256/1.682 billion yuan), corresponding EPS of 0.53/0.76/1.00 yuan, and the year-on-year growth rate for 2025-2026 will be 45/ 31%, respectively. We gave the company PE 27.36x in 2025 (20% premium compared to comparable companies, mainly due to the relatively small revenue share of the company's API pressure business), corresponding to a reasonable valuation of 33.686 billion yuan, with a target price of 20.85 yuan.

Risk warning: risk of policy uncertainty, new product approval and sales falling short of expectations, exchange risk.