2Q results were still soft with revenue down 14% YoY (or -11% QoQ) to RMB 6.26bn and net profit to shareholder down 24% YoY (or -28% QoQ) to RMB1.1bn, below our expectations. CSPC expects 5% HoH growth in 2H25 from the low base in 1H25, supported by the finished destocking of oncology drugs, rapid growth of NBP capsules in out-of- pocket channels, and increasing sales of PD-1, Omalizumab, and Mingfule (targeting RMB1bn in 2025). For BD collaboration, the management expects two more BD deals, each valued above US$5bn to be completed by YE25. We updated our TP to HK$11.5. We believe headwinds for legacy products are largely reflected in the stock price and this year's financial results, and BD should be a strong growth driver. However, we are still monitoring the sales ramp-up of new and sub-new products.
　　Key Factors for Rating
　　2Q results below our expectation: 2Q results were still soft with revenue down 14% YoY (or -11% QoQ) to RMB6.26bn and net profit to shareholder down 24% YoY (or -28% QoQ) to RMB1.1bn, below our expectations. Finished drugs sales continued to decline (-27% YoY, -8% QoQ) as legacy drugs faced stricter reimbursement controls and VBP headwinds. Except for 11% QoQ growth in cardiovascular, sales in all other core therapeutic areas declined QoQ: nervous system (-3%), oncology (-10%), anti-infective (-20%), respiratory system (-23%), and digestion and metabolism (-24%). GPM for drug sales fell 9ppts YoY and 2ppts QoQ to 62% due to price cut on key products and lower contribution from finished drugs. Excluding the impact of BD revenue, R&D expenses to finished drugs increased 8.5ppts to 31.4%.
　　Expects 5% HoH growth in 2H25 but slower NP growth: CSPC expects 5% HoH growth in 2H25 from the low base in 1H25, supported by the finished destocking of oncology drugs, rapid growth of NBP capsules in out-of-pocket channels, and increasing sales of PD-1, Omalizumab, and Mingfule (targeting RMB1bn in 2025). Although sales of NBP were hurt by tightened hospital budget control, CSPC has strengthened out-of-pocket channel of NBP capsule with sales through this channel expected to reach RMB600m and RMB1bn in 2025 and 2026. And CSPC does not expect VBP on NBP within 3 years and expects sales NBP capsule to sustain at RMB2bn in long term. However, the management expects a slower NP growth in 2H25 due to elevated R&D investment. The management expects growth to return to positive in 2026 (driven by NDRL inclusion of meloxicam nanocrystal and NMPA approval of KN026 and Paclitaxel albumin II) and accelerate from 2027. For BD collaboration, the management expects two more BD deals, each valued above US$5bn to be completed by YE25.
　　EGFR ADC updates: EGFR ADC has recruited 1000+ patients globally. The global Phase III trials for 3L+ EGFRm NSCLC and 2L EGFRwt NSCLC have clinical designs agreed with FDA, with ORR as endpoint for conditional approval and OS for full approval. The management expects patient enrolment for both trials to begin in 2H25, with approval expected in 3-4 years in overseas market. In China, patient enrolment of 2L EGFRm NSCLC phase III is ongoing and phase III for EGFR ADC+ osimertinib vs. osimertinib is expected to start in YE25. In addition, CSPC plans to initiate phase III studies in ESCC and HNSCC, etc. CSPC highlighted the drug's competitive ORR/OS trends in 2L EGFRwt NSCLC compared to TROP2 ADCs.
　　Abundant candidates to BD based on eight R&D platform: Thanks to CSPC's continued devotion to R&D, we believe BD revenue will serve as a continued contributor, particularly from (i) its metabolic portfolio (including small molecules, long-acting polypeptides, siRNA, and mAbs) and (ii) small-molecule drugs targeting DPP1, PDE4B, PDE3/4, IL-17, TNF-α, and Aβ.
　　Key Risks for Rating
　　Upside: (i) Better-than-expected product sales; and (ii) more BD collaboration achieved. Downside: (i) Slower-than-expected ramp-up of newly launched drugs; (ii) failure of R&D; and (iii) price cut on core drugs
　　Valuation
　　Following the results, we lowered our 2025 finished drug revenue forecast due to the soft 1H performance but raised our estimates for 2026 and beyond as we factored in continued out-licensing revenue from CSPC's rich pipeline. We expect BD revenue to account for 7-8% of total revenue from 2025-27. We increased our net profit forecast on savings in selling and admin expenses, partially offset by higher R&D costs. Given the falling interest rate cycle, we lowered the risk- free rate to 3.3% and the market risk premium to 6.7%. We also raised the terminal growth rate to 2.5% from 2.0% to better capture the long-term contribution of innovative drugs, yielding a TP of HK$10.7. We maintain our HOLD rating. We believe headwinds for legacy products are largely reflected in the stock price and this year's financial results, and BD should be a strong growth driver. However, we are still monitoring the sales ramp-up of new and sub-new products.