Core views

The company's 24Q1-3 revenue and profit were disrupted by price fluctuations, which disrupted the company's heparin API business in the short term. The revenue side resumed positive growth in Q3, and the profit side is expected to be mainly affected by exchange rate fluctuations. Overall, the company's performance showed an improving trend. Disturbances from external factors gradually decreased, and the performance was in line with our previous expectations. Heparin API prices stabilized at the bottom, the formulation business continued to explore overseas markets, and gross margin improved month-on-month.

Looking forward to the future: 1) Export production capacity for sterile injections has doubled, and new overseas drug registration approvals are continuously declared, and overseas formulations are expected to continue to be released; 2) as downstream inventories are digested and inventory removal is basically coming to an end, the price of heparin APIs will gradually rise steadily; 3) Focus on macromolecule business expansion in the medium to long term.

occurrences

The company released its report for the third quarter of 2024

On October 30, the company released the 2024 third quarter report. In Q1-3, the company achieved revenue of 3.088 billion, -1.72% year on year; net profit to mother 0.606 billion, -27.82% year on year; net profit after deducting non-return to mother 0.548 billion, or -33.41% YoY.

24Q3 achieved revenue of 0.945 billion yuan, +12.79% year over year; net profit to mother 0.201 billion, -6.54% year over year; net profit after deducting non-return to mother 0.18 billion, -15.29% year over year.

Brief review

Performance was in line with expectations, and disturbances from external factors gradually decreased

The company achieved revenue of 3.088 billion in Q1-3 in '24, -1.72% YoY; net profit to mother 0.606 billion, -27.82% YoY; net profit after deducting non-return to mother of 5.40.8 billion, or -33.41% YoY. 24Q3 achieved revenue of 0.945 billion yuan, +12.79% year over year; net profit to mother 0.201 billion, -6.54% year over year; net profit after deducting non-return to mother 0.18 billion, -15.29% year over year. On the revenue side of the first three quarters, we determined that it was mainly disrupted by the API business. Sales of pharmaceuticals and CDMO increased in the first half of the year, but sales of APIs declined slightly; the profit side was mainly affected by the drop in heparin prices, and price fluctuations disrupted the company's heparin API business in the short term. The revenue side of Q3 has resumed positive growth in the single quarter. The profit side is expected to be mainly affected by exchange losses caused by exchange rate fluctuations in the Q3 single quarter. Overall, the company's performance showed an improving trend. Disturbances from external factors gradually decreased, and the performance was in line with our previous expectations.

By sector: 1) Heparin API: The bottom of the price stabilized. The average export price of heparin in China dropped significantly after October 23. The average export price of 24H1 heparin was 4,915.32 US dollars/kg, a year-on-year decrease of 47.2% compared with the 23H1 average price of 9,302.90 US dollars/kg. Judging from 24Q3 customs data, heparin export prices were basically stable from month to month. The company's share of revenue in the API sector has dropped from over 60% in 2019 to less than 1/4 of 24H1. Currently, prices are in the bottom range and have stabilized. We judge that the 24H2 heparin price will further decline due to disturbances in the company's performance.

2) Formulation business: Continued development of overseas markets. The company's formulation business actively expands overseas markets, combining Meitheal's advantages on the GPO and channel side to ensure a steady increase in foreign sales revenue of formulations; in June '24, the company purchased all ownership of the US FDA approval for the adalimumab biosimilar drug developed by Coherus and entered the US biosimilar market; at the same time, the original ANDA variety was further expanded. In July '24, ropivacaine hydrochloride injection was approved for listing by the FDA. At present, the company has an overseas commercialization team of more than 100 people, and has built marketing platforms and achieved direct sales of formulations in North America, Europe and South America. Overseas market development has led to the continuous expansion of the company's formulation business.

Gross margin improved month-on-month, and exchange gains and losses are expected to fluctuate slightly. The company's 24Q1-3 gross profit margin was 41.41%, year-on-year -7.99 pct; 24Q3 company's gross profit margin was 44.07%, -4.32 pct year-on-year, and +2.3 pct month-on-month. The profit level fluctuation in the first three quarters was mainly due to the aforementioned price fluctuations in heparin API, and profitability gradually improved month-on-month. 24Q1-3 sales expense ratio 6.27% (-3.56 pct), management expense ratio 3.93% (+0.58 pct), R&D expense rate 7.0% (+0.23 pct), financial expense ratio 2.36% (+4.43 pct). The company's sales expense ratio has declined significantly, which is expected to be mainly due to a decrease in sales promotion expenses; the increase in financial expenses ratio is expected to be mainly affected by the decline in exchange profit and loss. The R&D cost rate has increased, and the company continues to increase R&D investment. As of 24H1, the company and its subsidiaries have 100 overseas drug registration approvals and 33 Chinese drug registration approvals to ensure an efficient R&D pace of filing, research, and reserve one batch. The net cash flow from 24Q1-3's operating activities was 1.055 billion yuan, -9.9% year-on-year. Compared with the margin of change in the company's profit side, operating cash flow remained good. The rest of the financial indicators are generally stable.

Future prospects: 1) Continued release of overseas formulations: The company adheres to the strategic framework of “based in China and the US, with a global perspective”, and continues to advance innovation and transformation. After 6 new production lines successfully passed the FDA on-site inspection, the company currently has 12 production lines that have passed the US FDA audit, and export production capacity for sterile injections has doubled. As subsequent production capacity climbs, the company's new overseas drug registration approvals are continuously reported. The overseas formulation business is expected to continue to expand. 2) Prices of APIs are expected to pick up: Previously, due to downstream companies' inventory removal, the heparin API industry is facing an impact. Judging from customs data, export prices are currently basically stable. We believe that as downstream inventories are digested and inventory removal is basically coming to an end, the price of heparin APIs will gradually rise steadily. 3) Focus on macromolecule business development: In June 2024, the company obtained all ownership of the US FDA approval for the adalimumab biosimilar drug YUSIM RY and entered the US biosimilar market. In addition, it also cooperated with Tonghua Dongbao on the three types of insulin, mendong, glycine, and laipong, and reached cooperation with Shuangcheng Pharmaceutical on injectable paclitaxel (albumin binding type) to obtain exclusive agency rights in the US market. The company has significant advantages in overseas channels. 24H1 already has nearly 100 products in operation in the North American market. It is expected that more than 2025 potential varieties will be approved. The subsequent pipeline expansion in the field of biosimilar drugs and complex formulations will provide a solid guarantee for the company's medium- to long-term performance growth.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 42.16 billion yuan, 52.01 billion yuan, and 6.384 billion yuan, respectively, up 7.2%, 23.4% and 22.8% year on year; net profit to mother will be 8.39, 11.95, and 1,541 billion yuan, respectively, up 543.1% (reverse loss), 42.3% and 29% year on year, respectively. Equivalent EPS is 0.52 yuan/share, 0.74 yuan/share, and 0.95 yuan/share, respectively. The corresponding PE is 28.7X, 20.1X, and 15.6X, maintaining a “buy” rating.

Risk warning

Risk of fluctuation in raw material prices: The main raw material of the company's products is crude heparin. If the price fluctuates greatly, it will have a big impact on the company's production costs. If the price increase cannot be passed on downstream, it will affect the company's profit performance.

Risk of changes in the international trade environment: Currently, the company's products are mainly exported, accounting for more than 70%. There is uncertainty about changes in the overall international trade environment and policy. If global trade frictions intensify further in the future, it may adversely affect the company's operations.

Risk of changes in the competitive landscape of the industry: Currently, a few mainstream international heparin formulation manufacturers have the vast majority of the market share. As the protection of patented drugs expires, new generic drugs are launched, and new patented drugs are introduced, it may have a great impact on the heparin drug market pattern. If the product market share of the company's main partners changes significantly, it may be further transmitted to the company's product sales, which will adversely affect the company's production and operation.

Industry policy risks: At present, centralized procurement of national pharmaceuticals and medical insurance negotiations are gradually being normalized. If the company's main heparin preparation products cannot win the bid in national procurement, sales of the company's heparin formulation products at public medical institutions may be restricted, which will adversely affect the company's domestic market share and business performance.