We expect that the Biosafety Act is likely to fail in legislation, which will benefit the company to continue to achieve performance growth in a relatively stable business environment. As global biomedical financing recovers, we are optimistic about the company's valuation and performance recovery.

The FY25 NDAA does not include the Biosafety Act, and the Biosafety Act is likely to fail. On December 7, the US Senate and House Armed Services Committee announced the text of the FY2025 National Defense Authorization Act/NDAA (National Defense Authorization Act/NDAA) after final negotiations between the two house committees. The Biosecure Act (Biosecure Act, number S.3558/H.R.8333) was not included in the FY2025 NDAA amendments, which meant that the Biosafety Act failed to pass the legislative path of joining the NDAA. The Biosafety Act can still advance separate legislation, but considering that the current US congressional window is less than two weeks away, we think the success rate of a separate law is extremely low.

Expand global production networks and hedge against geopolitical influences. Despite being disrupted by the Biosafety Act, Yao Ming Biotech has gained the trust of customers around the world, highlighting the company's excellent execution capabilities and strict compliance system. For example, in July, the company signed 4 Phase 3 clinical and commercial production contracts with a multinational pharmaceutical company. In order to meet the growing formulation needs of overseas customers, Yao Ming Biotech announced in November this year that it will expand its prefilled needle preparation filling capacity at its Leverkusen site in Germany. The production capacity plans to meet GMP production standards by 2026, strengthening the company's ability to meet the diverse needs of global customers. In addition, the company is actively expanding overseas production capacity. The Singaporean plant will be put into operation in 2026. First, it will support the operation of WUXI XDC. The company has also announced the expansion of production capacity at its base in Massachusetts, USA to 0.036 million liters.

We are optimistic about the recovery of global biomedical financing and drive the recovery in R&D demand. Global pharmaceutical financing showed an initial recovery trend in 2024. According to Arterial Orange data, global healthcare financing increased 1.1% year over year in the first 11 months of this year, recovering from a 21% year-on-year decline in 2023. At the same time, MNC pharmaceutical companies are resilient in their R&D investment. Chinese CXO companies, which are deeply involved in the global pharmaceutical industry chain, are already feeling the increase in overseas demand. We expect that the pre-clinical and early clinical R&D needs of PharmacomingBio will also benefit from a recovery in financing. The company's management aims to add 110 new projects in 2024. We expect that as the US interest rate cut cycle continues, global biomedical financing is expected to continue to recover, driving the growth of the company's CRO business.

Milestone revenue reflects the value of the company's R&D platform. Pharmaceutical Biotech is deeply involved in and empowers the domestic innovative pharmaceutical industry. Along with the rapid growth of domestic biotech companies' external licensing, Yao Ming Biotech has also received rich milestone revenues. For example, in August of this year, MSD purchased Tongrun Biotech's dual antibody CN201 with a down payment of 0.7 billion US dollars. The drug under development uses Yao Ming Biotech's dual antibody and continuous flow production technology, so Pharmaceutical Biotech will receive milestone revenue. Management anticipates that the combined milestone revenue will reach approximately 0.5 billion yuan in 2H24, which is expected to significantly increase the company's net profit.

Maintain a buy rating. Increase target price to HK$22.88 (WACC: 10.95%, sustainable growth rate:

2.0%) to reflect the reduced uncertainty of the Act and the recovery in overseas demand. We expect the company's revenue to increase 7.1%/12.4%/13.9% year over year in 2024E/ 25E/ 26E, and adjusted non-IFRS net profit up 0.8%/11.1%/13.4% year over year.