1H22 revenue expected to grow 68.5% YoY
　　Wuxi App Tech preannounced 1H22 results: Revenue may grow 68.5% YoY to Rmb17.76bn, and net profit may rise 73.3% YoY to Rmb4.64bn. Recurring net profit may grow 81.0% YoY to Rmb3.85bn, and adjusted non-IFRS net profit may increase 75.7% YoY to Rmb4.30bn. The firm’s preannounced results were in line with our expectations.
　　Trends to watch
　　Main business grows robustly; impacts of COVID-19 pandemic were manageable. The firm’s 1H22 revenue grew solidly, and it continued to strengthen its integrated Contract Research Development and Manufacturing Organization (CRDMO) and Contract Testing Development and Manufacturing Organization (CTDMO) business models. We attribute the rapid growth of revenue and profit to the firm's development & manufacturing (D&M) services. The firm adhered to COVID-19 containment measures in Shanghai, and swiftly formulated and implemented a business continuity plan that capitalized on the firm's global capacity, multiple sites and coverage of the value chain. As a result, the firm’s 2Q22 revenue may grow 66.16% YoY.
　　Ongoing capacity expansion to bolster order growth. In 1Q22, the firm completed the commissioning of a plant producing active pharmaceutical ingredients (API) in Changshu. Operations also started at the Changzhou Phase III project for Good Manufacturing Practice (GMP), which includes an R&D center and two plants. A plant at Jiangsu Taixing is under construction, and is due to commence operations in 2H22. A new oligonucleotide and peptide manufacturing facility for the firm’s subsidiary, WuXi STA, located at the API production facility in Changzhou, began operation in July 2022[1]. We think this further enhances the firm’s production capacity. Capex in 1Q22 was Rmb2.21bn and the firm expects this will reach Rmb9-10bn in 2022, helping to mitigate capacity bottlenecks and shortages of supply.
　　Upbeat on cell and gene therapy CTDMO business. The firm was preparing biologics license applications for four projects as of end-1Q22. In March 2022, the firm launched TESSA, the brand name for a new technology for scalable production of transfection-free adeno-associated virus. We see great potential for the technology. There were 14 TESSA evaluation projects as of end-1Q22. In April 2022[2], Wuxi ATU, a wholly owned subsidiary of the firm, announced a collaboration with the Agency for Science, Technology and Research (Singapore) to introduce TESSA technology to the Asia-Pacific region. In June 2022[3], Wuxi ATU announced a manufacturing partnership with US biotech firm Wugen for the novel immune cell therapy WU-NK-101. Wuxi ATU will provide manufacturing and testing services. We are upbeat about the long-term development of cell and gene therapy business, and expect the firm to grow.
　　Financials and valuation
　　We maintain our earnings forecasts for 2022 and 2023. The H-shares are trading at 33.1x 2022e and 28.3x 2023e P/E, and A-shares are trading at 37.5x 2022e and 32.0x 2023e P/E. For H-shares, we maintain OUTPERFORM but cut our TP by 8.0% to HK$150.00 (44.7x 2022e P/E and 38.2x 2023e P/E, offering 35.0% upside), given the systemic correction of H-shares in 1H22. For A-shares, we maintain OUTPERFORM and our TP of Rmb144.00 (50.0x 2022e P/E and 42.7x 2023e P/E, offering 33.3% upside).
　　Risks
　　Fluctuations in large orders or foreign exchange rates; uncertainty in development and approval of new drugs; disappointing capacity development.