2021 results in line with our forecast
　　Pharmaron announced 2021 results that revenue rose 45.0% YoY (52.3% YoY on a constant exchange rate) to Rmb7.44bn. Attributable net profit rose 41.68% YoY to Rmb1.66bn, recurring attributable net profit climbed 67.46% YoY to Rmb1.34bn and adjusted non-IFRS net profit grew 37.4% YoY to Rmb1.46bn. The results are in line with our expectation.
　　Trends to watch
　　Demand: Main businesses rapidly growing; ample project reserve.Pharmaron booked 2021 revenue of Rmb4.57bn for lab services (up 41.09% YoY), taking part in 565 drug discovery projects and having ample project reserve. Revenue from chemistry, manufacturing & controls (CMC) rose 42.90% YoY to Rmb1.75bn with about 80% of the revenue deriving from existing clients in the drug discovery business, suggesting synergy was strong. As of end-2021, the firm covered 1,013 drug molecules or intermediates, including 754 projects in preclinical stage. We foresee significant upside in CMC demand, as Pharmaron projects advance.
　　Supply: Internal construction and M&A to provide new momentum.Capex for internal construction rose 59.05% YoY to Rmb2.09bn and M&A increased 30.61% YoY to Rmb1.44bn. The Shaoxing Phase I project (200cbm) began operating in early 2022, and Pharmaron estimates the remaining 400cbm will begin operating in 2022. The Tianjin Phase III project (area around 40,000sqm) is gradually starting to operate. Phase II of Ningbo Campus I opened partially in 1Q21, and internal installation began for another part of the project. The firm has started constructing Phase I of Ningbo Campus III and expects to be operational in 1H24.Pharmaron completed the acquisition of production facilities in Cramlington in the UK in January, adding reactor volume exceeding 100cbm. We believe these projects will ensure future earnings growth.
　　Watch recovery of clinical CRO and large molecule, cell, and gene　therapy businesses. Revenue at the contract research organization (CRO) business rose 51.96% YoY in 2021 to Rmb956mn, with gross margin down 8.48ppt YoY to 10.31%. Pharmaron started a clinical-service subsidiary in May 2021 and the business is in consolidation. Revenue from large molecule, cell, and gene therapy services was Rmb151mn, but it still recorded a loss. Pharmaron Biologics(UK) has started taking external orders. The Phase I of Ningbo Campus II is the main base for　large molecule drug development and production services, and the firm expects it to start taking large-molecule Good Manufacturing Practice (GMP) projects in 1H23. We look forward to the firm’s improving capabilities and recovering profitability.
　　Financials and valuation
　　We maintain our 2022 and 2023 EPS forecasts at Rmb2.76 and Rmb3.65.Pharmaron A-shares are trading at 41.8x and 31.6x 2022-2023e P/E, and H-shares trade at 29.1x and 22.1x 2022-2023e P/E. We maintain OUTPERFORM for A-shares and our TP of Rmb143.50 (52.0x and 39.3x 2022 and 2023e P/E) offering 24.4% upside. We maintain OUTPERFORM for H-shares and our TP of HK$112.50 (35.0x and 26.5x 2022-2023e P/E) offering 20.1% upside.
　　Risks
　　Disappointing new business expansion; fluctuations in late-stage and commercial orders; forex fluctuations; loss of core employees.