Key investment points:

The API industry cycle is bottoming up, and long-term growth space is expected to open up under multiple catalysts.

In 2023, the domestic API industry was affected by the high base due to orders related to the epidemic in '22 and the inventory of downstream pharmaceutical manufacturers during the pandemic, and the performance of many API companies, including the company, fluctuated in the short term. Currently, there is a significant year-on-year increase in API production in a single month. 24H1 domestic API production is recovering year on year, and export volume continues to grow, which may mean that API inventory removal is nearing its end, and the demand side is expected to boost. At the same time, considering the huge space for generic drug APIs and formulations to go overseas under the cliff of overseas patents, integrated API and formulation companies are expected to fully benefit.

The company is a global leader in cardiovascular and psychotropic APIs, and the API business continues to expand.

The company is a major global supplier of cardiovascular and psychotropic ingredients. As of 24H1, the company had 66 CDE approved API registration numbers, 84 US DMFs, 57 European CEP certificates, and 24H1 API revenue of 1.89 billion yuan, an increase of 19.5% over the previous year. By type, cardiovascular APIs are the main source of revenue, accounting for more than half of revenue in 2023. Factors such as population aging are expected to drive a steady increase in demand for such APIs. The company's specialty APIs, such as neuroleptics and anti-infective drugs, have performed well in recent years, and the trend of diversification of the business structure is obvious, which is expected to drive the scale of the API business to expand further.

The formulation business uses domestic collection and release volumes, and overseas lays out major domestic formulations whose patents are about to expire. As of 24H1, the company has obtained CDE approval and passed the consistency evaluation for a total of 70 products. The company used collection as an opportunity to vigorously expand the domestic market, involving 36 formulations selected from national collection and rapid release; the company continued to improve the product matrix, and 2023/24H1 achieved 15/11 newly approved products respectively. Looking at overseas formulations, as of 24H1, nearly 100 products have obtained the US ANDA number (including temporary approval). The company has deployed drugs with high market prospects such as liptin/levetidine in advance and has obtained temporary approval from the FDA. It is expected that rapid release will be achieved after the relevant patents expire in the future.

Profit prediction and investment advice

We expect the company's net profit to be 1.31/1.62/1.95 billion yuan in 2024-2026, respectively, and the net profit growth rate to mother will be 58%/24%/20%, respectively. Using the comparable company valuation method, the average PE of comparable companies in 2024-2026 was 20X/16X/13X respectively. Considering the company's leading position as a cardiovascular and psychopharmaceutical API company and its advantages in integrated APIs and APIs, it was covered for the first time to give a “buy” rating.

Risk Alerts

Risk of falling API prices, risk of production safety accidents, sales of APIs and formulations falling short of expectations, new product development and promotion falling short of expectations