Downward guidance due to headwinds; anticipating recovery in 2H24
　　The Group reported 1H24 revenue of US$561m, a 44% YoY increase, primarily driven by a 156% YoY growth in cell therapy revenue, which reached US$280m. This growth offset a marginal 0.3% YoY decline in the non-cell therapy businesses. Management has revised down its full-year revenue growth guidance for Life Sciences from 15%-20% YoY to 10%- 15% YoY, reflecting the geopolitical impact on business during March and June. Due to ongoing industry headwinds and market conditions, full-year revenue for ProBio is now projected to decline by 10%-15% YoY, compared to the previous flat guidance. Consequently, we have revised down our 2024E/25E revenue/net loss forecasts for the Group by 8%/19% and 18%/37%, respectively, leading to a reduced SOTP-based TP of HK$29. Despite these challenges, the Group experienced a rebound in orders in July within the Life Sciences segment. ProBio also demonstrated a recovery in sales orders and is expected to see sequential revenue improvement in 2H24. For cell therapy, with the completion of Cartitude-5 enrollment and the approval of additional clinical production capacity at Novartis in July, we expect its revenue to increase QoQ in both 3Q24 and 4Q24. Maintain BUY.
　　Key Factors for Rating
　　1H24 Performance: The Group’s 1H24 revenue reached US$561m, up 44% YoY, driven by a 156% YoY increase in cell therapy revenue, offsetting the flat performance in non-cell therapy segments. Within non-cell therapy, Life Sciences saw a decline in demand and orders, particularly in the U.S. due to geopolitical concerns in June and March, though a recovery was noted in July. ProBio’s revenue declined by 43% YoY in 1H24 due to the challenging biotech funding environment in 2H23, which resulted in lower order intake. Management expects ProBio's margin pressure to continue into 2H24 and 2025, but anticipates a revenue recovery in 2H24, driven by a rebound in new orders (US$68m in 1H24 vs. US$36m 2H23 and US$70m 1H23). Bestzyme, though a smaller contributor to overall revenue, surpassed internal estimates by 10ppts, with external revenue growing 44% YoY.
　　Revised Guidance: For Life Sciences, management has revised full-year revenue growth guidance from 15%-20% YoY to 10%-15% YoY, while maintaining expectations for a GPM of 55% (+/-1%) and forecasting NP to grow faster than revenue. This adjustment reflects the geopolitical impact observed in March and June. However, July showed a return to a healthy growth trajectory. For ProBio, full-year 2024 revenue is now expected to decline by 10%-15% YoY (vs. previous guidance of flat growth) due to industry headwinds and market conditions. Despite this, a recovery in sales orders is anticipated, with 2H24 revenue expected to improve sequentially from 1H24 levels. The adjusted GPM for ProBio is projected to remain at 10%-15% in 2H24. For Bestzyme, following strong 1H24 performance, management now forecasts revenue growth of 25%-35% YoY, an increase from previous guidance. The GPM is expected to be around 40%, with an adjusted NPM close to 5%. For Legend, management plans to initiate commercial production at the new Obelisc (Ghent, Belgium) facility in 2H24 and complete the expansion of the Raritan site by year- end 2024. With the completion of Cartitude-5 enrollment and the approval of clinical production capacity at Novartis in July, commercial production capacity is expected to increase, driving revenue growth in 3Q and 4Q.
　　Results Review by Business Segment
　　Life Sciences: new orders declined in June but showed signs of recovery in July. Despite geopolitical tensions, the segment maintained stable growth, with external revenue reaching US$218m, a 9.5% YoY increase. The protein business outperformed, achieving 30% YoY growth, driven by synergies between gene synthesis and protein/antibody services, as well as improvements in turnaround time and platform innovations. Adjusted gross profit nearly doubled YoY, with an adjusted GPM of 54%, thanks to advancements in automation and labour efficiency. Adjusted NPM also improved to 22% in 1H24 from 19% in 1H23.
　　ProBio: new orders regained momentum in 1H24, though margin pressure is expected to persist in 2H24. ProBio’s external revenue declined by 43% YoY to US$37m in 1H24, driven by low order intake due to the challenging biotech funding environment in 2H23. Margin pressures are anticipated due to new capacity, including 2,000L viral vector commercial production and the operation of the U.S. GMP facility, leading to higher depreciation and operational costs. ProBio’s adjusted GPM dropped by 19 percentage points to 5%, with an adjusted net loss of US$19m. Management expects GPM to remain similar in 2H24 and 2025. The company also recorded a US$37m impairment on ProBio’s long-term assets and a US$113m fair value loss on preferred shares, reflecting market conditions and pricing trends. However, a revenue recovery is anticipated in 2H24, supported by a rebound in new orders.
　　Bestzyme: exceeded management expectations in 1H24. The segment delivered significant progress, surpassing internal estimates by 10ppts, with external revenue growing 44% YoY to US$26m. This was driven by the effective execution of the key account strategy and ongoing innovation in the enzyme portfolio. The company has observed parallel growth in both revenue and profitability. Adjusted NPM reached 8.8% in 1H24, with an adjusted net profit of US$2.3m.
　　Legend: expansion on track with a narrowed net loss. Legend’s external revenue reached US$280m in 1H24, a 156% YoY increase, primarily driven by continued capacity expansion, manufacturing efficiencies, and strong demand for Carvykti, which saw a 9% price increase in 2Q. R&D expenses rose 18% YoY due to ongoing activities related to cilta-cel, including startup costs for clinical production in Belgium and investments in solid tumour progress. Selling and distribution expenses increased by 38% YoY to support cilta-cel’s commercial activities, including sales force expansion and preparation for a second-line multiple myeloma indication launch. Administrative expenses grew by 35% YoY due to the expansion of administrative functions and infrastructure to enhance manufacturing capacity. Adjusted net loss narrowed to US$119m from US$226m in 1H23. Legend maintains a solid balance sheet with a cash position of US$1.3bn, expected to fund operations and capital expenditures through 2026.
　　Key Risks for Rating
　　Geopolitical tension; biotech funding pressure; break down of key partnerships.
　　Valuation
　　We revised down our 2024E/25E revenue/net loss forecasts for the Group by 8%/19% and 18%/37%, respectively, to reflect the downward guidance. We apply 15x P/E on 2025E Life Science, 6x P/S on 2025E ProBio GCT, 2x P/S on 2025E ProBio ADD, 2.5x P/S on 2025E Bestzyme, and DCF (WACC unchanged and terminal growth lowered from 4.0% to 3.5%) on Legend. Maintain BUY with a new TP of HK$29 (previously HK$33).