Key points of investment
Incident: The company issued an annual report. In 2016, it achieved revenue of 72 million yuan, -43.0%; net profit after deducting 0.02 billion yuan, -91.9%; net profit after deducting -05 million yuan, YoY -120.5%; net operating cash flow -334 million yuan, YoY -1877.7%; at the same time, the company released a quarterly report, 2017Q1 revenue of 0.1 billion yuan, +21.3%; net profit after deducting -0.03 billion yuan, -1908.5%; net profit after deducting non-parent net profit -03 billion yuan Yuan, -877.1% year on year; net operating cash flow -06 billion yuan, -52.73% year on year.
CRO business has clearly recovered, and new 2017Q1 orders have exceeded expectations. Affected by industry policies such as self-inspection and verification of drug clinical trial data, the company's clinical research trial projects slowed down in 2016, affecting the company's short-term performance. Looking at quarterly revenue, the company's 2016 Q1-Q4 and 2017Q1 revenue growth rates were -64.36%, -60.75%, -31.77%, -20.88%, and 21.28%, respectively. That is, the company's business began to recover in the third quarter of 2016, and the recovery progress in the first quarter of 2017 slightly exceeded expectations. By business: 1) Clinical research services that were most affected by clinical trial data verification achieved revenue of only 33 million yuan, -65.2% year on year, and gross margin decreased 15.58pp year on year; 2) Unaffected pre-clinical research services achieved revenue of 27 million yuan, +43.39% year on year.
Looking at the cost rate for the period, the overall increase in 2016 was 24.5 pp. The main reason was that the management cost rate increased by 19.4 pp due to an increase in R&D investment and an increase in clinical verification. Up to now, the amount of revenue from contracts executed by the company has not yet been confirmed has reached 460 million yuan, of which the number of orders for consistency evaluation is about 75 million yuan. In 2017 Q1 alone, the company added 130 million yuan in new orders, +400% over the same period, and the consistency evaluation increased by 55 million yuan. The order volume exceeded market expectations. We believe that with the recovery of the industry, both the company's revenue and gross margin will recover simultaneously.
Demand in the CRO industry is strong under the New Pharmaceutical Administration, and the company's performance is expected to explode starting in the second half of the year. Under the influence of a series of new drug regulation policies oriented towards quality and innovation, which began in 2015, the entire industry has increased its investment in the development of new drugs and the evaluation of the consistency of existing drugs. Judging from the annual reports disclosed by listed companies in the pharmaceutical industry, all major companies have greatly increased their investment in R&D. Currently, demand in the CRO industry is strong. The main reasons why we believe that the company's performance is expected to explode in the second half of the year are as follows: 1) Clinical trial approvals, which are about 4 times greater since October 2015, the company's orders are sufficient, and 2017Q1's new non-consistent evaluation orders have reached 75 million, which has reached the company's annual order volume in 2016; 2) Currently, the CFDA has disclosed a list of multiple batches of reference preparations. Judging from the time point of view, a large number of projects will enter the BE stage in the second half of 2017, and the performance is expected to explode; 3) Clinical resource bottlenecks are expected to be lifted, and the CFDA has begun clinical trials. In the new round of certification and review by the agency, it is expected that a large number of BE sites will be approved. At the same time, expectations for the liberalization of the BE test site filing system are strong, and the industry's production capacity bottleneck is expected to be lifted. We believe the company's performance is expected to begin to explode in the second half of 2017.
Profit forecasts and investment recommendations. It is estimated that the company's EPS in 2017-2019 will be 0.40 yuan, 0.89 yuan and 1.67 yuan respectively. We believe that the inflection point in the CRO industry is clear. The low point in the company's performance has passed, and at the same time, there are still internationalization expectations. Considering the company's high growth performance and small market value premiums, the “buy” rating is maintained.
Risk warning: The risk that the company's performance will fall short of expectations due to policy liberalization or inadequate implementation; the risk that industry regulations will exceed expectations, the CRO industry or company will be subject to administrative penalties, etc., or lead to a decline in the company's valuation.