Zai's 2Q24 product revenue increased 15% QoQ, mainly driven by the 76% QoQ growth of efgar, offsetting the roughly flat QoQ growth of niraparib and TTFields. We raised our sales forecast for Zai by 8% in 2024, to reflect the better-than-expected sales of efgar; however, we lowered our mid-term sales forecasts, factoring in 1) lower POS of TTFields on NSCLC and other solid tumours, 2) pricing pressure of SUL-DUR, repotrectinib and adagrasib due to competitive landscape change, and 3) slower-than-expected launch of bemarituzumab and KarXT. As mgmt. expects to continue with cost control, we trimmed our operation expenses estimations for 2024-26. By raising WACC while tuning down terminal growth, we cut DCF-TP to HK$36/US$46 for HK/ADR shares.

Key Factors for Rating

Efgartigimod sales beat while mid-term overall product sales under pressure. 2Q24 product revenue slightly beat our expectation by increasing 15% QoQ to US$100m, mainly driven by the 76% QoQ growth of efgar. As efgar is showing sustained uptake trend, mgmt. raised its revenue guidance from US$70m to US$80m+ in FY2024. However, total product revenue growth for other two major commercial products slowed down in 2Q24 with niraparib and TTFields basically flattish. We lifted our sales forecast for Zai by 8% in 2024 to reflect the higher-than-expected sales of efgar. However, we revised down our sales forecasts by 11%/19% for 2025/26, respectively, factoring in 1) lower POS of TTFields on NSCLC and other solid tumours, 2) pricing pressure of SUL-DUR, repotrectinib, adagrasib due to competitive landscape change, and 3) slower- than-expected launch of bemartuzumab and KarXT.

Continued cost control set path to profitability. 2Q24 and 1H24 net loss narrowed by 34% YoY and 21% YoY respectively. As mgmt expects to continue with cost control on R&D and SG&A spending, we trimed our operation expenses estimations by 3%/7%/11% for 2024/25/26, respectively, and maintained our expectation for Zai to achieve full-year profitability in 2026. As of 30 June 2024, Zai holds a cash position at US$730m.

Key Risks for Rating

1) Slower-than-expected product sales ramp-up; 2) failure or delay of clinical development for key pipeline; 3) breakdown of key partnership.

Valuation

We adopt DCF model to value Zai. We lifted WACC from 12.6% to 13.2% and tuned down terminal growth from 3.0% to 2.5% to reflect fiercer competition. We cut TP from HK$48/US$61 to HK$36/US$46 for HK/ADR shares. Maintain BUY.