The company announced that it has signed a joint R&D framework agreement with Junshengtai Pharmaceutical. The two sides will jointly carry out research and development, plan to establish a joint research center, develop innovative products, and create industry ecology and market promotion. This agreement shows the importance that Shisiyao attaches to innovative drugs in the field of metabolism and digestion. We are optimistic that more cooperation rules will be introduced in the future to inject fresh blood into Shisiyao. Looking ahead to 2024, although there is confirmation of a one-time cost within the year, considering that large infusions benefit from +4Q seasonal factors, solid preparations benefit from collection and release, and the recovery of API orders, we are optimistic that the profit side will stabilize during the year and maintain the “buy” rating.

Cooperate with Jun Shengtai to enter the field of metabolic digestion innovation

Junshengtai is an 18A listed company on the Hong Kong Stock Exchange, focusing on drug discovery and multi-target therapy in the field of metabolism and digestion. Currently, the company has independently developed 5 products. Currently, 2 products have entered clinical trials (of which the key product, ursodeoxycholerberine HTD1801 type II diabetes, has begun clinical phase III, and is estimated to complete clinical trials in 25 years. In addition, indications such as metabolic steatohepatitis, hypertriglyceridemia, and primary sclerosing cholangitis are also in advanced clinical stages in China or overseas). We are optimistic that Shi Siyao will use this to enter the field of metabolism, give full play to the company's advantages in drug screening, production side quality and cost, and promote the development, improvement and commercialization of formulations. This framework agreement mainly indicates cooperation intentions. We are optimistic that more terms will be introduced in the future, which is expected to increase the company's revenue and profit.

Big infusion 4Q recovery, steady year-round demand, stabilizing the volume and price of APIs and improving cost control

Demand in the large infusion sector has gradually picked up since November. Looking ahead to 24 years, we are optimistic about the steady growth of this sector (over 2.2 billion bottles/bag sales throughout the year). Consider: 1) 4Q demand gradually returns, the capacity utilization rate of stand-up pouches continues to increase, and non-PVC soft bag OEM orders are progressing steadily; 2) the volume of high-margin peritoneal dialysis solutions released and the variety of products will continue to be rich. Although regional large infusion tenders affect the apparent ASP of products, considering lower sales expenses, the profit margin of the large infusion sector is expected to be maintained. In the API sector, we estimate annual revenue of around HK$0.8 billion. Consider: 1) caffeine: a steady recovery in sales (we expect sales to exceed 5,000 tons in 24 years); 2) tight supply of upstream intermediates of azithromycin and increased downstream demand driven price increases, so we are optimistic that the volume and price will rise sharply throughout the year. Furthermore, by increasing the self-supply ratio, the company is expected to make breakthroughs in both cost control and quality optimization.

Other business: Stable revenue scale for drug packs/solid preparations, optimistic about new product launches to drive sales

The solid formulation sector estimates that revenue has remained flat for 24 years. I am optimistic that subsequent new products will continue to be approved for marketing+ the company will continue to push forward the integrated strategy of APIs and formulations to start next year. Furthermore, the revenue volume of the medicine package sector has remained stable for 24 years. The ampoule sector may have experienced a drop in revenue for 24 years due to the one-time impact of bromoxine, but the 8 varieties/new products that previously won the bid are expected to boost revenue.

Profit forecasting and valuation

Considering the stable demand for large infusions and the stabilizing volume and price of raw materials during the year, we expect the company to have EPS of 0.45/0.52/0.60 in 24/25/26 (previous value: HK$0.46/0.53/0.59), give 25 times 10 times PE (same as the consistent forecast average of comparable company Wind), target price of HK$5.20 to maintain “purchase”.

Risk warning: The price of APIs fluctuates, demand for large infusions weakens, and the risk of commercialization of new products.