Core views

The company achieved good 24H1 revenue and profit side growth. Sales in the API business have maintained steady growth, and new and old products continue to advance. The formulation business continues to expand, channels are well developed, and terminal coverage is being promoted at an accelerated pace, driving the company's gross margin to increase. Profitability continues to increase, and operating cash flow performance is good. Looking forward to the future, 1) estradiol/estradiol didroprogesterone composite packaging tablets have been declared for listing, and it is expected that the continuous enrichment of new pipelines in the subsequent formulation business will drive the company's performance growth. 2) The construction of the Simeglutide API fermentation workshop plant and synthesis workshop plant has been completed. Concerning the progress of Simei's production capacity, the expansion and release of new production capacity will drive good growth in the API business.

occurrences

The company released the 2024 semi-annual report

On August 28, the company released its 2024 semi-annual report. 24H1 achieved revenue of 7.3.1 billion yuan, +32.21% year over year; net profit to mother 0.189 billion, +96.66% year over year; net profit after deducting non-return to mother 0.187 billion, +98.81% year over year.

24Q2 achieved revenue of 0.395 billion in a single quarter, +57.69% year over year; net profit to mother 0.106 billion, +112.73% year over year; net profit after deducting non-return to mother 0.105 billion, +108.73% year over year.

Brief review

Performance is in line with forecast expectations, focusing on formulation volume and API production capacity release

24H1 achieved revenue of 0.731 billion, +32.21% year over year; net profit to mother 0.189 billion, +96.66% year over year; net profit after deducting non-return to mother 1.8.7 billion, +98.81% year over year. 24Q2 achieved revenue of 0.395 billion in a single quarter, +57.69% year over year; net profit to mother 0.106 billion, +112.73% year over year; net profit after deducting non-return to mother 0.105 billion, +108.73% year over year. Both revenue and profit sides achieved good growth, mainly due to: 1) the company continued to focus on its main business, continued promotion of superior APIs, and steady sales growth; 2) the gradual increase in pharmaceutical products, further reflecting the results of market expansion. Results are in line with previously forecast expectations.

APIs have maintained steady growth. The company's 24H1 API business sales have maintained steady growth. New and old API products continue to advance, and the penetration of various target overseas markets has been continuously accelerated. Sales branches have been set up in Brazil, the United States, Portugal and India to further improve the international marketing network to provide customers around the world with high-quality products and efficient services. 24H1 submitted 1 API registration in China, 1 API registration with the US FDA, and 2 API registrations in Brazil; 2 products passed the domestic CDE review, and 1 product passed the Korean review. 15 new invention patent applications were submitted; 7 newly authorized invention patents and 1 newly authorized foreign invention patent (US). The API business continues to expand in depth.

Channels are well developed, and the formulation business continues to expand. The company's 24H1 formulation business performed well, and didroprogesterone tablets achieved sales revenue of 9,247.5 0.09 million yuan. The company's didroprogesterone tablets were approved by the NMPA for the first generic marketing in June 2023, and it is also the company's first approved formulation product. In terms of sales, the company continues to improve and optimize the national dealer network, set up specialized academic teams to promote it, strengthen expert system construction, and accelerate terminal coverage and promotion through the Beijing-Tianjin-Hebei Provincial Alliance collection. The development of core benchmark hospitals is also strengthening the declining coverage and promotion of county-level channels. Currently, didroprogesterone tablets have been connected to the Internet in 30 provinces and cities, and 4,411 hospitals have been admitted (including community outpatient clinics). At the same time, the gross margin of the formulation category is high, and the company's gross margin is increasing due to the volume of the formulation category.

Profitability continues to increase, and formulation promotion affects sales expenses. The company's 24H1 gross profit margin was 57.02%, year on year +7.23 pct; net profit margin was 25.81%, year on year +8.29 pct; 24Q2 company's gross profit margin was 59.86%, +4.96 pct year on year; net profit margin was 26.94%, year on year +6.53 pct; we think it is mainly related to the steady growth of superior pharmaceutical ingredients and the increase in gross margin driven by the volume of the formulation business. 24H1 sales expense ratio 9.44% (+4.76 pct), management expense ratio 10.87% (-3.94 pct), R&D expense ratio 8.96% (-1.16 pct), financial expense ratio -2.53% (-1.05 pct), 24Q2 sales expense ratio 11.35%, +5.31 pct year over year. The increase in the sales cost ratio was mainly due to the fact that sales of the company's first formulation product began in the second half of '23, and formulation marketing and promotion continued, so 24H1 increased formulation sales expenses over the same period last year. The management cost rate and R&D cost rate are well controlled. The decline in financial expenses was mainly due to an increase in exchange earnings and interest income. 24H1 invests 0.065 billion yuan in R&D. The products under development cover small-molecule APIs, peptides and oligonucleotide APIs and formulations. At the same time, it continuously improves and continuously optimizes the production process of existing leading products, enhances the automation of the whole process, improves production efficiency, enhances product quality stability, and maintains the continuous market competitiveness of the company's products. Future R&D progress is worth looking forward to. The net cash flow from 24H1's operating activities was 0.167 billion yuan, an increase of 12.8% over the previous year, and the operating cash flow performance was good. Other financial indicators are generally stable.

Future prospects: 1) Continued release in the formulation business: The company's first formulation product, didroprogesterone tablets, has the advantage of integrated drug formulations. Currently, channel promotion and sales volume are good. 2024 is the first complete sales year, and the dosage situation is worth looking forward to. At the same time, the company has since developed several formulation varieties. The listing application for estradiol tablets/estradiol didroprogesterone tablets composite packaging declared by the subsidiary Yangzhou Orient was accepted in July 2024, and the production line construction project with an annual output of 0.3 billion estradiol/estradiol didroprogesterone composite packaging tablets has now completed process verification batch production. It is expected that the continuous enrichment of new pipelines for the follow-up formulation business will drive the company's performance growth.

2) Production capacity expansion drives the growth of the API business, and follow the progress of Simei's production capacity: the company continues to expand product categories in the field of APIs, and construction of multiple production line projects is underway: (1) Production line project with an annual output of 308 tons of specialty APIs and 0.2 billion tablets of anti-tumor preparations (Phase I): the civil construction part has basically been completed, equipment installation is in progress, and public systems and automation systems are being installed; (2) Simeglutide API production line and supporting facilities construction project with an annual output of 300 kg: Simeglutide raw drug fermentation workshop plant and synthesis workshop Room The construction has been completed, the installation of the equipment has been completed, and the equipment is being commissioned. Currently, the peptide API industry is booming, and the progress of Simei's production capacity construction is worth paying attention to. It is expected that the corresponding expansion of production capacity in 24-25 will drive the good growth of the company's API business.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 1,614, 20.92 billion yuan, and 2,686 billion yuan, respectively, up 27.9%, 29.6% and 28.4% year on year; net profit to mother will be 4.08, 5.41, and 706 million yuan, respectively, up 40.8%, 32.7% and 30.5% year on year, respectively. Equivalent EPS is 1 yuan/share, 1.33 yuan/share, and 1.74 yuan/share, respectively. The corresponding PE is 21.9X, 16.5X, and 12.7X, maintaining a “buy” rating.

Risk warning

Risk of changes in the international trade environment. Currently, the company's products are mainly exported, accounting for more than 85% of overseas revenue. There is uncertainty about changes in the overall international trade environment and policy. If global trade frictions intensify further in the future, it may adversely affect the company's operations.

Industry competition increases risk: Currently, the company's main competitors are specialty API and formulation manufacturers in Europe, America, India, China and other countries. As market competition further intensifies, a company's failure to maintain its competitive advantage may lead to a decline in the company's profit level.

Industry policy risk: The company currently has pharmaceutical products on the market and will gradually launch more pharmaceutical products in the future. In terms of domestic industry policies, policies such as “consistent evaluation of generic drug quality and efficacy”, “drug marketing license holder system”, and “centralized volume procurement” have been introduced one after another. Currently, centralized drug procurement and medical insurance negotiations are gradually being normalized. In the future, if companies fail to adapt to these changes in industry regulations in a timely manner, it may have an adverse impact on revenue.