Profit turnaround driven by core business operations. Henliu's FY23 revenue increased 67.8% YoY to RMB5.40bn, driven by strong sales of HANQUYOU (trastuzumab biosimilar) and serplulimab (PD-1). HANQUYOU recorded RMB2.74bn revenue in FY23, +58% YoY. We think HANQUYOU may be free from VBP risks in 2024 due to relatively moderate competition landscape for Herceptin biosimilars. GP margin (as % of product sales) increased to 83.0% in FY23, vs 80.7% in FY22. Selling expense ratio (as % of product sales) decreased to 38.5% in FY23, from 39.2% in FY22, and admin ratio decreased from 13.2% in FY22 to 8.4% in FY23, showing improving operating efficiency. R&D expense decreased 20% YoY to RMB1.12bn in FY23. In FY23, Henlius recorded c. RMB1.05bn operating cash inflows, and achieved net profit of RMB546mn, marking the Company's first profitable year in its history. We believe that the net profit was primarily derived from its core operations, namely the promotion of drugs. Thus, we are confident that this profitability will be sustainable in the coming years. As of end 2023, Henlius had RMB989mn cash reserves.

Serplulimab (PD-1) has global potential thanks its superior profile in SCLC and CRC. The sales of serplulimab was RMB1.12bn in FY23, with 2H23 sales remaining stable (+1% HoH). This stability is notable even amidst a challenging period for the industry in China, attributable to the drug's differentiated profile in SCLC. The NDA for serplulimab as a first-line treatment for ES-SCLC was accepted by the EMA in Mar 2023, with the approval expected in 3Q24. In the US, Henlius is conducting a bridging study of serplulimab for 1L ES-SCLC, with data release and BLA submission expected by end-2024. Henlius has recently released encouraging data of serplulimab in 1L mCRC, especially in the underserved MSS CRC (CMBI report, link). A Ph3 trial in Asia, combining serplulimab with HLX04 and chemotherapy for first-line mCRC, is set to commence.

Promising innovative assets with global BD potential. HLX22 (a novel HER2 mAb) in combo with HANQUYOU and chemo had demonstrated overwhelming PFS signals in 1L GC compared with the current SoC (CMBI report, link). We expect Henlius to start a global Ph3 trial of HLX22 + HANQUYOU + chemo as a first-line treatment for GC, with Keytruda in the control arms. Henlius has developed a differentiated ADC platform leveraging MediLink's payload-linker technology which enables selective release of payload in tumor microenvironment. Based on this platform, HLX42 (EGFR ADC) has recently completed FPI in China, and also received a fast track designation from FDA for EGFR-TKI resistant NSCLC. HLX42 showed promising potential in post osimertinib EGFRm NSCLC in preclinical studies. HLX43 (PD-L1 ADC) started a Ph1 study in China in late 2023 with US IND approved as well. We think Henlius is likely to achieve global BD deals for its differentiated innovative assets, such as HLX22, HLX42 and HLX43.

Maintain BUY. We expect Henlius to file NDAs in the US for HLX14 in 3Q24 and for HLX11 in end 2024. HLX11 may become the first pertuzumab biosimilar in the US/EU. We maintain our DCF-based TP unchanged at HK$18.67 (WACC 11.46%, terminal growth 2%).