\u3000\u3 Shengda Resources Co.Ltd(000603) 456 Zhejiang Jiuzhou Pharmaceutical Co.Ltd(603456) )
Key investment points
Financial performance: the growth rate of revenue and net profit in 2022q1 exceeded our expectations
The company announced the annual report of 2021 and the results of the first quarter of 2022. The revenue in 2021 was 4.063 billion yuan, a year-on-year increase of 53.5%; The net profit attributable to the parent company was 634 million yuan, a year-on-year increase of 66.6%; The net profit margin attributable to the parent company is 15.6%. From the performance of 2022q1, the revenue of 2022q1 was 1.37 billion yuan, a year-on-year increase of 60.5%; The net profit attributable to the parent company was 210 million yuan, a year-on-year increase of 120%; The net profit margin attributable to the parent company is 15.1%. We believe that the company’s revenue and profit growth in the first quarter of 2022 exceeded our expectations.
Growth driven: capital expenditure is laid and operating capacity is further improved
Growth by segment: in 2021, the company’s cdmo revenue maintained rapid growth (revenue of 2.31 billion yuan, growth rate of 78.7%, revenue accounting for 56.9%), and the API business grew steadily (revenue of 1.31 billion yuan, growth rate of 16.3%, revenue accounting for 32.2%). From the perspective of cdmo business, we believe that the rapid growth of cdmo revenue in 2021 comes from: ① the continuous growth of Novartis cooperation projects (according to Novartis 2021 annual report, the global sales of Novartis is US $3.55 billion, a year-on-year increase of 42%; the global sales of rebossini is US $940 million, a year-on-year increase of 36%). ② The number of cooperation projects increased (in 2021, the number of listed projects of the company increased by 4, the number of phase III clinical projects increased by 9, and the number of phase II and phase I clinical trial projects increased by 144). Looking forward to 20222024, we expect that the company’s revenue and profit are still expected to maintain a relatively rapid growth, which comes from: ① the key projects of Novartis cooperation still maintain a relatively rapid growth (we expect the compound growth rate of terminal sales of Novartis to be about 30% in 20222024, and the growth rate of anti-tumor cooperation varieties such as rebossini is higher). ② With the promotion of key customer strategy, customers outside Novartis continued to grow, and the middle and early projects continued to improve (it can be verified from the side that the amount of contract liabilities of the company continued to increase in 2021 and the first quarter of 2022). ③ Cdmo revenue contribution of peptides and preparations (according to the company’s 2021 annual report, “polypeptide platform has undertaken the customized peptide and polypeptide new drug ind entrusted R & D business of multiple new drug research and innovation companies”, “in 2021, the company has completed the construction of polypeptide technology platform and undertaken multiple projects, and will further expand the polypeptide R & D team in 2022 and build the commercial production capacity of polypeptide according to the project progress”).
From the perspective of API business, according to the 2021 annual report, the revenue of hypoglycemic API increased significantly in 2021 (the revenue increased by 57.7% year-on-year in 2021). We expect that the API & preparation business is expected to maintain steady growth from 2022 to 2024. Considering the CMO project and MPP increment, the growth rate is more than expected, Specifically: ① the commercial volume of the listed API continues to increase (according to the 2021 annual report, “the newly developed hypoglycemic products boost the customer preparation products to be approved for listing in Europe”). ② CMO project landing contributed to growth. ③ After being authorized by MPP, it will open up the market development space of global specific drugs. ④ Contribution increment of preparation business (according to the 2021 annual report, “17 generic preparation projects are in different R & D stages, among which the preparation product aed-02 sustained-release tablets anda is still under FDA approval and submitted the nmpa listing application in July 2021; the preparation product t2dm-02 sustained-release tablets have obtained the nmpa listing application acceptance notice”).
In addition to the expansion of the project, it is more important to further improve the operation capacity under the boom growth laid by capital expenditure. According to the 2021 annual report: ① accelerated capital expenditure and production (in 2021, capital expenditure was 580 million yuan, construction in progress was 470 million yuan and fixed assets were 2.17 billion yuan, all the largest since listing). ② The operating capacity will be further improved, and the turnover rate of fixed assets will reach 1.94 in 2021, significantly higher than that in 2020. We believe that the improvement of the company’s asset operation capacity comes from the optimization of project structure and the appearance of scale effect. With the commissioning of the construction project of REBO Taizhou plant and the R & D center project of REBO (Suzhou) Pharmaceutical Co., Ltd., we are more optimistic about the sustainability of the company’s high growth.
Profitability: the net profit margin is expected to be basically stable and gradually improved
In terms of gross profit margin, the company’s gross profit margin decreased slightly in 2021, which we believe is related to exchange fluctuations. With the expansion of the company’s early projects and new customers and the improvement of the scale effect of API projects, we expect the gross profit margin to increase in 2022. In terms of net profit margin, the company’s net profit margin increased in 2021. We believe that it is related to the rate compression under the effect of income scale. We expect the company’s operating profit margin to be basically stable and gradually increased from 2022 to 2024.
Viewpoint: upgrading of supply capacity and sustained high growth
We believe that the upgrading of supply capacity is the marginal change of the company’s cdmo business. With the release of production capacity and the improvement of operation capacity, we are more optimistic about the sustainability of high growth. ① Upgrading of supply capacity: we are concerned that under the operation experience of new technology platforms and large projects, the number of audits of the company’s factories and EHS system has increased significantly, and the diversified customer project structure is the result of the upgrading of supply capacity (“in 2021, the company passed 10 official inspections and 99 customer audits successively, and Ruibo America successfully passed the FDA review; in the second half of 2021, Ruibo Hangzhou successfully passed the IP audit of important customers”). ② Capacity release: according to the notes of the annual report, the projects under construction such as “South Sichuan API production base” and “four-dimensional technology Pharmaceutical Project Phase I” are progressing rapidly, and the acquired Teva capacity is also expected to support the development of commercial projects.
Profit forecast and valuation
We expect that the company’s EPS from 2021 to 2023 will be 1.06, 1.47 and 1.96 yuan / share respectively, and the closing price on April 20, 2022 corresponds to 42 times of PE in 2022. We believe that the management experience of key customers and large projects is the foundation of the company in the next stage. We are optimistic about the marginal change of the company’s supply capacity and the expansion of new fields (peptides, nucleic acids, etc.) and new businesses (preparations, cdmo, etc.). Considering the poor expectation of cdmo business growth elasticity & Sustainability during the revenue structure switching window period, the company maintains the “buy” rating.
Risk tips
Risk of production safety accidents; Risk of shutdown caused by environmental events; Cdmo business order volatility risk; Risk that the progress of new drug market review is less than expected; Risk of major customer loss, etc.
