In 1H23, the company’s revenue increased 6.3% YoY and attri.NP grew 14.6% YoY, largely in line with our expectation. 2Q23 results improved QoQ, with revenue up 10.5% and NP up 45%. WuXi has demonstrated growth certainty in terms of non-COVID revenue (+28% YoY in 1H23 and +40% YoY in 2Q23), especially that from overseas market (+42% YoY in the US), and non-COVID backlogs (+25% YoY in 1H23). However, we hold a conservative view towards its long term growth until the second growth engine (e,g. CGT, TIDES) matures. Considering the recent weak demand from CXO clients, we revised down our revenue forecasts for 2023E/24E/25E by 0.3%/2.1%/3.0%. We also lowered our long-term growth forecasts to reflect the increasing competition in the industry. As a result, our DCF model derived a new TP of HK$118 (previously HK$139), implying 49% upside. Reiterate BUY.
　　Key Factors for Rating
　　2Q23 results improved QoQ. WuXi recorded 1H23 revenue of RMB18.9bn, +6.3% YoY, and attri.NP of RMB53.1bn, +14.6% YoY, largely in line with our expectation. 2Q23 revenue was RMB9.9bn, +6.7% YoY and +10.5% QoQ. If excluding the COVID-19 commercial projects, revenue increased 39.5% YoY in 2Q23, and 28% YoY in 1H23. 2Q23 net profit was RMB3.1bn, +5.1% YoY and +45% QoQ, showing solid growth amid the fading COVID-19 orders. In terms of backlogs, if excluding the COVID-19 projects, backlogs increased 25% YoY in 1H23.
　　Mature businesses grew steadily and new businesses made breakthroughs. In 1H23, revenue of Chemistry increased 2.6% YoY, but surged 51.6% YoY if excluding COVID-19 revenue, and that of Clinical CRO and SMO rose 29.6% YoY. For new businesses, TIDES in Chemistry is providing D&M services to 16% of global peptide and oligo new drugs under the clinical stage.ATU (cell gene therapy service) owns four projects that have commercialisation potential which are expected to be launched in 2H23 and 2024. DDSU (domestic new drug development service) has received the first sales royalty, and expects its sales royalty to achieve a 50% CAGR in the next 10 years.
　　US and EU still solid while domestic yet to turn around. Revenue from the US and EU in 1H23 accounted for 77.3% of total revenue, of which US was RMB12.4bn, +42% YoY if excluding COVID-19 projects, and EU was RMB2.2bn, +19% YoY. In contrary, revenue from China slightly grew 2% YoY to RMB3.2bn. 1H23 revenue from top 20 largest global pharmaceuticals was RMB7.1bn, strongly increased by 47% YoY if excluding COVID-19 projects. Nevertheless, DDSU’s revenue declined 17.9% YoY in 2Q23 and 24.9% YoY in 1H23, reflecting that the weak demand in China has not yet turned around. The company’s number of staff was reduced by 7% in 1H23, which we believe was for the purpose of cost reduction and efficiency enhancement.
　　Key Risks for Rating
　　1) Declining biotech financing; 2) fierce competition; 3) geopolitical risks.
　　Earnings Forecast and Valuation
　　In our view, WuXi App has demonstrated continuous growth certainty in terms of non-COVID revenue, especially from overseas market, and backlogs. We prefer CXOs with end-to-end service platform, such as WuXi App, that are less affected by the tightening biotech financing in China and profit erosions caused by new businesses. However, we believe that the CXOs may have passed the fast growing stage, and will maintain a lower but steady growth until their second growth engines (such as cell gene therapy, etc.) mature.
Considering the weaker demand in near term, we revised down our revenue forecasts for 2023E/24E/25E by 0.3%/2.1%/3.0%. We also tuned down our long-term growth forecasts to reflect the fiercer competition, and derived a new TP of HK$118 (previous TP was HK$139).
We estimate WuXi to achieve revenue of c.RMB41.9bn/53.3bn and attri.NP of c.RMB10.5bn/12.5bn in 2023E/24E. Our new TP implies 28x 2023E PE. Reiterate BUY.