3SBio announced its 1H24 results, with revenue up 16.0% YoY to RMB4.389bn, beating BOCIest, thanks to strong growth of TPIAO.

Meanwhile, adjusted net profit only increased by 1.5% YoY, below market expectation. 3SBio's short-term growth still relies on its core products (eg. TPIAO, Yisaipu, and EPO), while its new engine Mandi and CDMO businesses were hindered by the soft consumption sentiment and industry dynamics change, respectively. Maintain HOLD and target price of HK$6.2.

Key Factors for Rating

1H24 revenue beat while adjusted net profit missed on increased R&D expense: In 1H24, Revenue was up 16.0% YoY to RMB4.389bn, beating our expectation, mainly on the strong growth of its core product TPIAO (RMB2.48bn, +23% YoY) and recovery of Yisaipu (RMB329m, +10% YoY) and EPO (RMB516m, +11% YoY). Meanwhile, the growth of another key engine Mandi slowed down to 10% YoY (vs. 36% YoY in 1H23), due to the soft consumption sentiment in 1H24. Gross margin improved 1.9ppts to 86.5%. S&M expense ratio stayed at 36.3% while R&D expense ratio climbed 2.7ppts to 11%, pushing R&D expense up by 55% YoY to RMB476m. Net profit increased by 11.2% YoY to RMB1.09bn. Adjusted net profit only increased by 1.5% YoY, much slower than the topline growth mainly due to increased (i) R&D expenses and (ii) tax rate.

Management guidance: The management maintains the guidance of double- digit topline growth while expecting slower growth in adjusted net profits than the topline, mainly due to R&D devotion. The key factor for the R&D growth will depend on the development progress of 707 (PD-1/VEGF), which has initiated phase II trials in PD-L1+ NSCLC, +chemo in 1L NSCLC, in 1L mCRC, and gynecological tumor. The management also shared that growth of Mandi was faster in July than in 1H24.

Key Risks for Rating

Downside risks: 1) increasing competition, 2) further price cut on core products, and 3) failure of major clinical trials.

Upside risks: 1) better-than-expected drugs sales, and 2) faster-than-expected pipeline progress.

Valuation

Post results, we fine-tuned 2024-26E revenue by 2% by increasing the revenue contribution from TPIAO given it expands the indication (from CIT to CTIT and CLDT (NDA submission expected in 2024)) and decreasing sales from Mandi and CDMO businesses given the soft consumption sentiment and change in CDMO industry dynamics. We also decreased the long term revenue from Mandi and CDMO businesses. We increased gross margin to factor in higher contribution from TPO and other biologics and lifted R&D expenses ratio to reflect the company's devotion in R&D such as candidate 707. Maintain HOLD rating and target price of HK$6.2 (WACC of 11.5% and terminal growth rate of 0%).