Key points of investment

The Q3 Company's revenue & profit fluctuated slightly due to the impact of the business structure, exchange gains and losses, and increased interest expenses on convertible bonds. Looking at the company's Q1-Q3 gross margin in a single quarter continued to increase month-on-month, and in comparison with the same industry, the company's single Q3 gross margin & net margin were in the top 5 in the industry, and the profitability performance was outstanding. We continue to be optimistic about the scarcity of the company's high competitive barriers, rich product echelons, and second growth curve resonance under the fragmentation of the overall performance of the API industry.

Performance: Q3 revenue & profit fluctuated

2024Q1-Q3 achieved revenue of 1.088 billion yuan, up 17.97% year on year; net profit to mother of 0.284 billion yuan, up 22.04% year on year; net profit after deducting 0.282 billion yuan, up 44.50% year on year; in a single quarter, 24Q3 achieved revenue of 0.358 billion yuan, down 3.30% year on year; net profit to mother of 0.095 billion yuan, down 30.33% year on year, mainly due to 23Q3 disposal The subsidiary generated revenue, which was due to a higher base; net profit after deduction was 0.094 billion yuan, down 6.24% year on year.

Growth analysis: quarterly fluctuations, trend is still positive

We continue to emphasize the scarcity of the company's high competitive barriers, rich product echelons, and second growth curve resonance due to the fragmented performance of the API industry. We estimate that the fluctuation in the company's Q3 revenue may be due to the decline in foreign trade and other business restructuring, etc. In the long run, the rapid growth in Q1-Q3's performance is due to: ① the continuous advancement of superior APIs and steady sales growth; ② the gradual increase in pharmaceutical products.

Looking ahead to 2024-26, ① APIs: Continued release of high-barrier raw materials, focusing on major varieties of simeglutide and small nucleic acids. Looking at growth drivers, we believe that sales volume is expected to continue to grow steadily with new market development, new processes & the release of new production capacity of the company's dominant APIs and intermediates (didrogestrel, abiraterone acetate, eplerenone, etc.). Commercial production lines for simeglutide and small nucleic acids, which are potentially major products of 2024H2, may be in operation, and are expected to contribute more elasticity starting in '25.

② Formulation: The release of didroprogesterone tablets is accelerated, more product declarations are being made, and the flexibility of the formulation is optimistic in a better competitive pattern.

In June 2023, the company's major product, didroprogesterone tablets, was approved. It is the company's first formulation, and the competitive pattern is good. As of June 30, 2024, didroprogesterone tablets have been listed in 30 provinces and cities, and 4,411 hospitals (including community outpatient clinics) have achieved sales revenue of 0.092 billion yuan, and rapid release. We are optimistic about the potential for droprogesterone tablets to reduce the volume of the better competitive landscape. In addition, marketing applications for estradiol tablets/estradiol didroprogesterone tablets composite packaging, enzalumide tablets, and dotilavir sodium tablets have been accepted. We are optimistic about the launch of more formulation varieties and growth links, which will drive the formulation business to maintain a relatively rapid growth rate.

Profitability: The gross margin & net margin fluctuated in Q3, and the comparison with the same industry is still impressive

2024Q1-Q3's gross sales margin was 58.22% (up 2.58pct year on year), the net sales margin was 26.08% (up 0.85pct year on year), and the net profit margin after deduction was 25.87% (up 4.75pct year on year). On the cost side, the sales expense ratio was 8.21% (up 0.92 pct year on year), the R&D expense ratio was 9.68% (down 0.70 pct year on year), the management cost ratio was 11.09% (down 2.06 pct year on year), and the financial cost ratio was -1.09% (down 0.29 pct year on year).

The decrease in the sales expense ratio in Q3 offset the decline in gross margin and the increase in the financial expenses ratio, and the net interest rate after deduction declined slightly. The gross sales margin of 2024Q3 was 60.68% (down 3.69 pct year on year, up 0.82 pct month on month), and the gross margin of Q1-Q3 continued to increase in the single quarter. Net sales margin was 26.62% (down 10.12pct year on year), and net profit margin after deduction was 26.26% (down 1.04pct year on year). On the cost side, the sales expense ratio was 5.69% (down 5.50 pct year on year), the R&D expense ratio was 11.16% (up 0.38 pct year on year), the management cost ratio was 11.54% (up 0.87 pct year on year), and the financial expense ratio was 1.86% (up 1.63 pct year over year). We estimate it was mainly due to exchange losses and increased interest costs on convertible bonds.

Comparing with the same industry, the profitability performance is outstanding. In Q3, the company's gross margin was higher than the average value of Shenwan's API sector (32.64%, arithmetic average method), ranking 4th (the top 5 were Jiankai Technology, Nanowei, Orient, and Huayuan Biotech); the net sales margin was higher than the average value of Shenwan's API sector (11.94%, arithmetic average method), ranking 3rd (the top 5 were Hehua Co., Ltd., Huayuan Biotech, Orient Pharmaceutical, and Aoxiang Pharmaceutical); looking ahead to 2024, consider high gross margin raw materials and pharmaceuticals The share of variety revenue is expected to continue to increase, leading to an increase in the company's gross margin, The dynamic net interest rate maintained an upward trend.

Analysis of business quality: abundant cash flow, accelerated fixed asset turnover

Net cash flow from 2024Q1-Q3 operating activities was $0.301 billion, a slight increase over the previous year, which was higher than net profit. “Cash received from sales of goods and provision of services” increased year-on-year (2024Q3:

104.20%, 2023Q3:95.06%), and the company's fixed asset turnover accelerated in 2024Q1-Q3. We are optimistic that the company's operating quality will continue to improve.

Profit forecasting and valuation

According to the three-quarter report, considering the company's exchange profit and loss and the pace of sales of some products, we slightly adjusted the profit forecast. The company's EPS for 2024-2026 is 0.94, 1.23, and 1.57 yuan respectively (previously 0.96, 1.25, and 1.57 yuan, respectively), and the closing price on October 30, 2024 corresponds to 24 times PE in 2024. We are optimistic about the company's high competitive barriers, rich product echelons, and scarcity of the second growth curve. The commercialization of the company's specialty APIs and formulation varieties is expected to support steady revenue and profit growth in 2024-2026. Small nucleic acid & peptide products are expected to contribute elasticity and maintain an “increase” rating.

Risk warning

Production safety accidents and quality risks; risk of formulation promotion falling short of expectations; risk of order delivery volatility, etc.