What's new
Pharmaron preannounced 2021 results, estimating revenue of Rmb7.44bn (+45.00% YoY), attributable net profit of Rmb1.66bn (+41.68% YoY), recurring attributable net profit of Rmb1.34bn (+67.46% YoY) and adjusted non-IFRS net profit of Rmb1.46bn (+37.40% YoY). The preannounced results slightly beat our expectations, thanks to the uptrend in main business demand and progress in the development of its integrated platform.
Comments
Rapid growth for various segments in 2021; main business maintained strong growth and new business expansion well on track. The firm expects 2021 revenue of Rmb4.57bn for lab services (+41.09% YoY), Rmb1.75bn for CMC (+42.90% YoY), Rmb960mn for clinical development services (+51.96% YoY) and Rmb151mn for biologics and CGT services (+466.58% YoY). In addition to increasing its net profit, the firm raised net proceeds of about Rmb3.78bn from the issuance of H-share convertible bonds, which would be invested in project development and business expansion. The firm’s total assets expanded 54.42% compared with early 2021.
2021 non-recurring gains likely at Rmb300–350mn, including: 1) about Rmb150mn of gains from changes in fair value of equity investments and disposal of investments in listed and unlisted companies; 2) about Rmb60–80mn of non-cash gains from changes in fair value of derivative financial instruments, due to the firm’s fluctuating H-share prices; and 3) other gains from investment in low- and medium-risk bank financial products, government subsidies, and gains from non-effective hedging of foreign exchange options and forward foreign exchange contracts. The firm’s non-recurring gains for 2020 were around Rmb370mn.
Smooth capacity expansion for CMC services to ensure order ramp-up. The firm largely completed the construction of its Tianjin Phase III project (with an area of around 40,000sqm) and the project began operating in 1Q21. The Shaoxing Phase I project (81,000sqm) is progressing smoothly, and it should contribute new capacity of 600cbm chemical reaction kettles. We expect the firm to complete construction and start operation of the project in 2022.
Financials and valuation
Considering improving demand for the main business, we raise 2021–2023 EPS forecasts 4.2%, 12.6% and 11.6% to Rmb2.09, Rmb2.76 and Rmb3.65. Pharmaron A-shares and H-shares are trading at 38.1x and 25.2x 2022e P/E. Considering recent sector valuation correction and liquidity, we maintain TP at Rmb161 (58.3x 2022e P/E with 53.1% upside) and HK$150 (46.3x 2022e P/E with 85.0% upside). We maintain OUTPERFORM for A-shares and H-shares.
Risks
Disappointing integration of businesses acquired and/or new business expansion; fluctuations in late-stage and commercial orders; forex fluctuations; loss of core employees.