Simcere reported 1H24 results with revenue down 7.9% YoY, below our expectation, mainly on the softer-than-expected performance of Sanbexin, weak oncology sales, etc. Adjusted net profit increased by 36.5% YoY thanks to the improved operating margin. The management guided down the topline growth rate for 2024 from 10%-15% YoY to flattish/slight increase and maintained the guidance of 30% YoY growth in adjusted net profits for 2024. Post results, we cut our 24-26 revenue forecasts by 13%-15% to factor in soft 1H24 results and cut 12-month TP to HK$7.6. Maintain BUY.
　　Key Factors for Rating
　　Soft topline performance in 1H24: Simcere reported 1H24 results with revenue down 7.9% YoY, below our expectation. Sanbexin is still digesting the price cut of 32% in 1H24, dragging down the sales of CNS products by 14% YoY. Oncology products also witnessed 21% YoY decline, mainly due to decrease in Enweida, Endostar, etc, amid industry rectification activities. Sales of autoimmune products grew by 29% YoY. Revenue from the innovative drugs was RMB2.2bn (-8.7% YoY), accounting for 70.7% of the total revenue. Gross margin improved 3ppts to 79%. The SG&A ratio remained at 44%, while R&D expenses ratio decreased by 4.8ppts to 18%. Adjusted net profit increased by 36.5% YoY to RMB538m thanks to the improved operating margin.
　　Management guidance: the management expects flattish or slight growth in the top line and 30% YoY growth in the adjusted net profit in 2024. The management expects the proportion of innovative drugs to increase from 72% in 2023 to 75% in 2024 and 80% in 2025, driven by the sales ramp-up of COSELA and ENLITUO after NDRL inclusion in 2025 and the products to be approved in 2H24-25 (eg. Sanbexin sublingual tablets (in 4Q24), ENZESHU (VEGF mab, in 2Q25), QUVIVIQ (DORA, in 2H25). The management expects the gross margin to further improve to 80%, the R&D expenses ratio to stay at c.20%, S&M expenses to remain at 36%-37%, and the payout ratio to stay at 30%-60% in the future.
　　Other pipeline updates: the management expects to complete the patient enrolment of phase III studies of Rademikibart (IL-4Rα) in atopic dermatitis, LNK01001 (JAK1) in rheumatoid arthritis, Deunoxavir Marboxil for children, and Endostar thoracoabdominal effusions. For BD projects, the management highlighted the license-out opportunities of SIM0500 (GPRC5D/BCMA/CD3) and ADC products. Simcere will continue to license in products which have large indications and have synergy with its current portfolio.
　　Valuation
　　Post results, we lowered 2024-26 sales estimates by 13%-15%, respectively, to factor in soft revenue in 1H24 and weaker-than-expected ramp-up of innovative drugs amid the rectification activities. We fine-tuned our net margin mainly on improved GPM, slightly decreased R&D expenses ratio, etc. We revised 12-month DCF based TP to HK$7.6 (WACC: 10.5%, terminal growth rate: 2.0%). Maintain BUY.
　　Key Risks for Rating
　　(i) Higher-than-expected price cut on core products, (ii) uncertainty of pipeline development, (iii) delayed commercialisation progress, and (iv) competition.