According to the Securities Times app, the Pacific Securities released research reports stating that in Q1-Q3 2024, the revenue of the active pharmaceutical ingredient sector saw a slight year-on-year increase, while the net profit attributable to the parent company and the non-recurring net profit grew rapidly year-on-year. The profitability improved significantly, with the growth rates of revenue and profit increasing each quarter, especially the noticeable increase in profit growth rate. The sector's profitability in Q3 reached a new high in nearly three years, with a slight upward revision in valuation, still at historical lows. With the gradual expiration of heavyweight product patents and the overseas destocking nearing completion, the demand side of the active pharmaceutical ingredient sector is expected to continue to recover in Q4 2024.

The main points of Pacific Securities are as follows:

A total of 32 companies were selected in the active pharmaceutical ingredient sector. In Q1-Q3 2024, the sector achieved revenue of 89.738 billion yuan (+6.74%), a net profit attributable to the parent company of 12.66 billion yuan (+27.89%), and a non-recurring net profit of 11.63 billion yuan (+24.42%). In Q3 2024, the sector achieved revenue of 29.125 billion yuan(+12.64%), a net profit attributable to the parent company of 4.111 billion yuan (+58.93%), and a non-recurring net profit of 3.885 billion yuan (+63.07%).

The main reasons for the high-speed profit growth of the sector in Q3 are:

1. In the second half of 2023, the sector was affected by factors such as product price decline and destocking downstream, resulting in a relatively low base; 2. In Q2-Q3 2024, global downstream manufacturers gradually completed destocking, and shipments of active pharmaceutical ingredient companies gradually recovered, while some companies accelerated the release of new products; 3. In terms of prices, the prices of some products in Q3 2023 had already dropped to low levels, with the year-on-year price decline in Q3 2024 significantly smaller than in the first half of the year; 4. The continuous effectiveness of cost reduction and efficiency improvement measures by each company led to a year-on-year decrease in expense ratio; 5. The impact of impairments decreased year-on-year.

The sector's profitability in Q3 reached a new high in nearly three years.

In Q1 2024, the gross margin of the sector was 36.38%, with a net margin of 12.78%. In Q2, the gross margin was 37.21%, with a net margin of 15.52%. In Q3, the gross margin was 38.27%, +1.88pct year-on-year, +1.06pct quarter-on-quarter, with a net margin of 14.07%, +3.98pct year-on-year, -1.45pct quarter-on-quarter, both gross margin and net margin reaching a new high compared to the same period in the past three years.

In the first three quarters of 2024, the sector's net margin showed a significant year-on-year increase, and the gross margin showed a trend of improvement quarter by quarter. The main reason is the intensified industry competition in 2023, and the decrease in shipments due to destocking downstream, leading to a weakening of economies of scale. Meanwhile, the expense ratio increased, and in the second half of 2023, there was a significant decline in net margin due to impairment effects. In the first three quarters of 2024, some product price reductions gradually narrowed and gradually stabilized, with global downstream manufacturers gradually ending destocking, and the shipment volume of active pharmaceutical ingredients companies gradually recovering. The scale effect increased, the cost reduction and efficiency enhancement effects began to show, the expense ratio decreased, and the impact of impairment was significantly reduced, leading to a restoration of profitability.

The sector's valuation has been slightly adjusted upwards but still remains at historically low levels.

Since 2023, the active pharmaceutical ingredient sector has faced pressure from intensified industry competition and declining product prices, resulting in performance pressure. Valuations have continued to remain at historical lows. As of the end of Q3 2024, the active pharmaceutical ingredient sector's PE ratio was 30.33 times, at the 18th percentile historically, an 8 percentage point increase from the end of Q2, and a premium rate of 19.38% compared to the health care sector.

Several heavyweight product patents are set to expire successively, and the patent cliff is expected to bring about an increase in demand for active pharmaceutical ingredients.

From 2023 to 2026, the expiration of downstream formulation patents is projected to impact sales by $175 billion, a 54% increase compared to the total from 2019 to 2022. In H1 2024, the output of active pharmaceutical ingredients from industrial enterprises above designated size was 1.789 million tons, a year-on-year increase of 2.2%. Among these, Q1 was 86.4 tons, down 7.0% year-on-year, and Q2 was 0.924 million tons, up 12.8% year-on-year. In H1 2024, the import value of active pharmaceutical ingredients and intermediates from China to India was 1.685 billion yuan, a 6.78% year-on-year increase, with Q1/Q2 figures of 0.827 billion yuan and 0.859 billion yuan, respectively, showing year-on-year increases of 3.35% and 10.41%. The import volume was 0.1907 million tons, significantly increasing by 14.53% year-on-year, with Q1/Q2 figures of 0.0914 million tons and 0.0993 million tons, respectively showing year-on-year increases of 7.21% and 22.18%. Both import value and volume have reached the highest levels in the past four years. Considering the situations in China and India, the demand side of the active pharmaceutical ingredients industry demonstrates a significant marginal improvement, and the destocking phase may be nearing its end.

Investment advice

1) In 2024, continue to expand into the formulations sector and focus on stocks with strong performance certainty, such as Aurisco Pharmaceutical (605116.SH), Zhejiang Ausun Pharmaceutical (603229.SH), etc.

Stocks with a high proportion of new product business or relatively aggressive capacity expansion, such as Jiangxi Synergy Pharmaceutical (300636.SZ), Zhejiang Huahai Pharmaceutical (600521.SH), Jiangxi Synergy Pharmaceutical (300966.SZ), etc.;

Stocks with existing products heavily affected by destocking or relatively low current profit margins, with great potential for subsequent performance recovery, such as Guobang Pharmaceutical (605507.SH), etc.;

Stocks with thematic investment attributes such as weight loss drugs, such as Aurisco Pharmaceutical (605116.SH), etc. (* indicates not deeply covered)

Risk warning: Insufficient release of production capacity, risk of product price decline, risk of product research and technological innovation, intensified market competition risk, eco-friendly policy risk, exchange rate risk.