In 2023, revenue was RMB7.8bn (+13.8% YoY), in line with BOCI estimate and consensus while attributable net profit missed consensus by dropping 19.1% YoY to RMB1.55bn on higher Opex, interest expenses and other one-off items. Net profit adjusted for non-operating item increased 17.7% YoY to RMB1.95bn. Overall, TPIAO saw rapid growth (+24% YoY) thanks to indication expansion, and Mandi demonstrated fast growth (+ 26% YoY) despite slowed growth rate in 2H, while revenue of EPO was dragged by provincial-level GPO. The management expects a double-digit growth of revenue in 2024 and implies a more favourable dividend policy. Maintain HOLD and cut TP to HK$6.2.
Key Factors for Rating
2H23 revenue in line but profit missed on higher Opex. 3SBio reported 2H23 revenue up by 7% YoY to RMB4.0bn, largely in line with BOCI estimate, mainly thanks to the strong growth of TPIAO (RMB2.2bn, +20% YoY) and Mandi (RMB629m, +20% YoY). However, weak sales performance of EPO (RMB477m, -20% YoY) and Yisaipu (RMB199m, -28% YoY) dragged the growth, mainly blamed on the price cut from regional-level centralised procurement and slower hospital entry pace amid industry rectification for pre-injected Yisaipu. GPM improved by 2.9ppts YoY to 85.3% while Opex ratio expanded as S&M/ RnD/ G&A expense ratio increased 2.5ppts/1.6ppts/1.5ppts YoY, eroding the operating margin by 8.7ppts to 17.6%. Attributable net profit plummeted 41% YoY to RMB569m, below BOCI estimate and consensus, partly blamed on the higher interest expense, fair value loss on financial assets, and FX loss.
Double-digit topline guidance with more attractive dividend. Given the steady sales trend in 2M24, the management expects 3SBio to deliver a double- digit growth in revenue and to see decent growth in bottom line in 2024. Looking ahead, the company expects to adopt a more favourable dividend policy, per management.
Key Risks for Rating
Downside risks: 1) loss of momentum on TPO; 2) further price cut on TPO; and 3) failure of major clinical trials.
Upside risks: 1) better-than-expected sales ramp up of Mandi; 2) better-than expected sales ramp up of Cipterbin and CDMO business; and 3) faster-than- expected pipeline progress.
Valuation
Post results, we increased 2024/25 revenue forecasts by 0%/2%, mainly on higher contribution from TPIAO, and correspondingly lifted our GPM forecast by 2.3ppts/4.0ppts. Meanwhile, we nudged up the distribution and selling expense on a par with 2023 due to advanced sales team setup in overseas markets. Cut our 12-month DCF based TP to HK$6.2 (WACC: 11.5% and terminal growth 0% unchanged). Maintain HOLD.
Key milestones expected in 2024 and 2025: (i) The company expects TPIAO to be approved for the treatment of children ITP and to submit NDA of chronic liver disease related thrombocytopenia (CLDT) in 2024; (ii) SSS06 (long-acting EPO) is expected to submit NDA in 2024; (iii) For the autoimmune franchise, the management expects 608 (IL-17A mAb) and 613 (anti-IL1β mAb) to file NDA application for psoriasis in 2H24 and acute gouty arthritis in 2025, respectively; (iv) Remitch will submit sNDA of chronic liver disease pruritus and Winlevi will submit NDA of acne vulgaris in 2025 after the completion of the bridging trial.