Ping An's point of view:

China's leading chemical companies are expected to continue to improve marginally on the profit side. China Biopharmaceuticals is a leading company in China's chemical industry. The company's revenue in 2023 was 26.199 billion yuan (-8.97%), which declined mainly due to the sale of Chia Tai's main interests in Qingdao and the impact of medical anti-corruption (the revenue side increased 0.7% year-on-year in 2023 under a continuous business scale). 2024H1 achieved revenue of 15.874 billion yuan (+11.1%). Along with the collection and release of innovative products, the company's revenue side returned to a positive growth trajectory. The company's 2024H1 adjusted non-HKFRS net profit was 1.54 billion yuan (+14.0%). Along with cost reduction and efficiency on the production side and optimization of marketing management, the company's profit side accelerated growth inflection point began to appear.

The four core business segments go hand in hand to continuously promote the transformation of innovation+internationalization strategies. With strong sales strength, the company focuses on the four major treatment fields of oncology, liver disease, respiratory system, and surgery/analgesia, and continues to promote innovation and transformation. In 2023, the company spent 4.403 billion yuan on R&D, accounting for about 16.8% of revenue, of which R&D investment in innovative drugs and biopharmaceuticals accounted for more than 77%. View by section: 1.

Tumors: The new indications for the blockbuster anlotinib combination PD-1/PD-L1 have been approved and are expected to continue to catalyze, which is expected to impact the 10 billion market. The introduced single-product brightener ibergestine alpha injection has safety advantages, and release is expected to accelerate after inclusion in medical insurance. Furthermore, the targeted KRAS-G12C inhibitor gesulexib for second-line NSCLC and the CDK2/4/6 multi-target inhibitor Kumoxi for second-line breast cancer are all in the NDA stage, and the oncology business is expected to continue to be a mainstay in the company's innovation pipeline. 2. Liver disease:

With its indications for treating drug-induced liver damage, the large single product magnesium isoglycyrrhizinate is expected to co-resonate with the company's tumor pipeline. In addition, NASH's major indications are the PPARα/γ/delta agonist laraninol and the recombinant human FGF21-FC fusion protein TQA2225 are in the middle to late clinical stages, and are expected to help the company continue to improve the value of the liver disease pipeline; 3. Breathing: continuous collection and release of budesonide inhalation solution, innovative targets for various COPD, asthma, chronic cough, etc., are in the middle and late clinical stages, and production has been reported; 4. Surgery/analgesia: large single product flurbiprofen gel patch continues to rapidly release and production has been reported Loxoprofen sodium gel patches are expected to continue to grow. The exclusive PL-5 antimicrobial peptide is in clinical phase III and is expected to help the value of the company's surgery/analgesia pipeline continue to increase.

In terms of internationalization, the company adheres to the dual strategy of importing+going out. On the one hand, it benefits domestic patients by deepening strategic BI cooperation and introducing high-quality products in a differentiated manner. On the other hand, through the acquisition of F-Star's world-leading dual-resistance innovation platform, overseas BD licenses for high-quality varieties, and the expansion of overseas markets along the Belt and Road, it has created the company's second growth pole.

The risks of collecting chemical generic drugs have basically been clarified, and biosimilar drugs are expected to usher in rapid growth. The company's chemical generic drug collection risk has basically been clarified. By the end of 2023, all non-exclusive varieties with sales exceeding 0.5 billion had been collected, and the company's first-imitation/copying capabilities were strong. Combined production cost reduction and efficiency and sales personnel efficiency were improved, which is expected to help the company maintain stability of generic drugs.

The company has many types of biosimilar drugs, has the highest application ranking, and has production capacity cost advantages. Various biosimilar drugs, such as adalimumab, bevacizumab, rituximab, trastuzumab, and liraglutide, have been approved by the NMPA for marketing in 2022 to 2024, and are expected to usher in rapid domestic release. The varieties under development, such as pertuzumab and simeglutide, are expected to continue to promote domestic substitution, helping the company's biosimilar growth in the medium to long term.

Investment advice: Considering that the risks of collecting biopharmaceutical chemical generic drugs in China have basically been clarified, large biosimilar varieties are rapidly released at home and abroad, and innovative drugs continue to advance in research pipelines, we expect the company to achieve revenue of 29.334/33.613/38.817 billion yuan respectively in 2024-2026, and net profit to the mother of 2.595/3.081/3.75 billion yuan respectively (not considering one-time income from the sale of Zhengda Qingdao, etc.). Furthermore, the company's specialty sectors such as liver disease, breathing, and surgery/analgesia will continue to gain strength, which is beneficial to the company Long-term value increase, first coverage, and “recommended” rating.

Risk warning: 1) Drug approval falls short of expectations: Drug approval policies and regulations may change, affecting the ongoing approval process, and there may be delays in approval of the company's innovative products. 2) The marketing volume of new drugs falls short of expectations: Whether each node progresses smoothly after the launch of the company's innovative products has a significant impact on the sales volume of the company's products. 3) The impact of national policies: risk of entry into negotiations and risk of price decline.