CSPC Pharmaceutical reported 1H24 revenue of Rmb16.28bn (+1.3% YoY) and net profit of Rmb3.02bn (+1.8% YoY). Its adjusted net profit reached Rmb3.22bn (+1.7% YoY), lower than our expectation, mainly due to the declining sales of finished drug sector in 2Q24. CSPC’s blended gross margin increased 1.7ppts YoY to 71.6% in 1H24 with the rising sales contribution of finished drugs (83.2% in 1H24 vs 80.4% in 1H23). Its selling expense-to-revenue ratio decreased 1.2ppts YoY to 29.3% in 1H24. Given the lower than expected results in 1H24, we lower our EPS forecast from Rmb0.56 to Rmb0.51 in 24E, from Rmb0.63 to Rmb0.56 in 25E, and from Rmb0.72 to Rmb0.60 in 26E. We lower our target price from HK$9.0 to HK$7.3. With 29% upside, we maintain BUY rating.
　　Declining sales of finished drug sector in 2Q24. Sales of CSPC’s finished drugs increased 4.8% YoY (-8.1% YoY in 2Q24) to Rmb13.5bn in 1H24, representing 83.2% of its total revenue. Given the GPO price cut of Duomeisu and Jinyouli, sales of oncology products decreased 10.2% YoY to Rmb2.7bn in 1H24, representing 19.8% of the total sales of finished drugs. Although Duomeisu and Jinyouli are facing sales pressure, we expect the rising sales contribution from new products such as irinotecan, PD-1, omalizumab, TNK, etc. In addition, as for the sales by therapeutic fields, sales of nervous system disease, anti-infective, cardiovascular disease, respiratory disease and digestion and metabolism products, increased 15%/8%/-5%/-14%/56% YoY, respectively, representing 39%/17%/9%/6%/5% of the total finished drugs.
　　Weak performance of API sector. Revenue of vitamin C API business declined 5.4% YoY to Rmb984m in 1H24 given the declining demand. Meanwhile, due to the decrease of overseas demand, revenue of antibiotics API decreased 6.4% YoY to Rmb871m. In addition, revenue of functional food and others business decreased 25.2% YoY to Rmb880m mainly due to the declining caffeine price.
　　Continuous investments on innovative pipeline. CSPC’s R&D expenses increased 10.4% YoY to Rmb2.54bn, with the R&D expense-to-revenue ratio of 15.6% in 1H24 (vs 14.3% in 1H23). The company currently has seven products under NDA review process and 19 products under phase II/III pivotal clinical trials, including KN026 (HER2 BsAb), DP303C (HER2 ADC), CM310(IL-4R), ulsinumab, secukinumab, etc. As for the ADC pipelines, SYSA1801 (Claudin 18.2 ADC) is under phase II trials for GC. In addition, SYS6010 (EGFR ADC) and SYS6002 (Nectin-4 ADC) are under phase I trials for advanced solid tumors. In addition, SYS6023 (ADC) has recently obtained clinical trial approval from the FDA. In terms of the GLP-1 pipelines, CSPC has completed the patient enrollment for the phase III trial of TG103 (GLP-1) for the treatment of overweight and obesity in China and the phase III trial for the treatment of type 2 diabetes is under patient enrollment period. In addition, semaglutide is under the phase III trial for the treatment of type 2 diabetes, with the patient enrollment ongoing.
　　Maintain BUY. Given the lower than expected results in 1H24, we lower our EPS forecast from Rmb0.56 to Rmb0.51 in 24E, from Rmb0.63 to Rmb0.56 in 25E, and from Rmb0.72 to Rmb0.60 in 26E. We lower our target price from HK$9.0 to HK$7.3. With 29% upside, we maintain BUY rating.
　　Risks: Lower-than-expected product sales; delay of key pipeline products.