1H22 results in line with our forecasts
United Laboratories announced its 1H22 results: Revenue grew 9.8% YoY to Rmb5.18bn. Specifically, revenue from intermediate products fell 9.9% YoY to Rmb741mn, that from bulk medicine rose 29.7% YoY to Rmb2.55bn, and that from finished products dropped 2.1% YoY to Rmb1.89bn. Attributable net profit increased 1.0% YoY to Rmb630mn. The board of directors proposed an interim dividend of Rmb0.05/sh in 2022, with a payout ratio of 14.5%. The firm guides for a payout ratio of 28-30% for 2022. The firm's results were in line with our expectations.
Trends to watch
The firm believes that prices of intermediates and bulk medicine remain in an upward trend. In 1H22, ASPs of the firm’s penicillin industrial salt, 6-APA and amoxicillin rose 39%, 33% and 23% YoY to Rmb95.4/BOU, Rmb250/kg and Rmb222/kg. The firm expects the growing downstream demand to offset pressure from the rising cost in the upstream of the industry, and is optimistic about prices of its products in the next 6-18 months. The firm continues to adjust the revenue structure for its intermediates and bulk medicine, aiming to gain larger global market share for downstream semi-synthetic penicillin-based API products.
Sales channel adjustments for insulin products completed; the firm maintains its sales volume growth guidance set in early-2022. The firm’s 1H22 revenue from insulin products fell 6.8% YoY to Rmb620mn, that from recombinant human insulin injections dropped 17% YoY to Rmb348mn, that from insulin glargine injections declined 3% YoY to Rmb237mn, and that from insulin aspart injections reached Rmb35.20mn (vs. Rmb12.20mn in 2021). We note that most provinces and cities implemented centralized procurement prices in mid to late-May. The firm made a compensatory payment of Rmb64mn to its distributors for the impact of price difference on their inventory in April-May, and sales significantly recovered in June. Shipments of the firm’s recombinant human insulin injections and insulin glargine injections rose 6% and 40% YoY in 1H22.
The firm maintains its sales volume growth guidance set in early-2022 at 10% for recombinant human insulin injections and 80% for insulin glargine injections. Meanwhile, it guides for the annual sales volume of insulin aspart injections at 2mn units, targeting to cover more than 50% of grassroots hospitals and 60% of county-level hospitals. The firm’s gross margin of insulin products now stands at 80%, and management guides for the net profit margin of this business at around 20% in the future.
Veterinary medicine products to become a new growth driver; R&D of new drugs well on track. The firm’s 1H22 revenue from veterinary medicine totaled Rmb210mn. The firm maintains its 2022 revenue guidance for veterinary medicine at Rmb600mn, as pork prices recover. The firm and Muyuan Foodstuff (Muyuan) set up a joint venture in July, and we expect the production line to begin operation in 2-2.5 years. We believe Muyuan’s annual procurement from the firm may reach Rmb800mn-Rmb1bn during this period. Considering the rapid growth of the breeding volume of Muyuan, we expect the annual procurement to reach Rmb1-2bn when the production line comes online.
The firm guides for its capital expenditures at Rmb500mn, Rmb400mn and Rmb400mn for 2022, 2023 and 2024. The firm’s 1H22 R&D expenses amounted to Rmb243mn (up 19% YoY), with an R&D expense ratio of 4.7%. Liraglutide and degludec-insulin injections are undergoing Phase III clinical trials, and the firm expects to gain registration approvals in 2024 and 2025. The firm obtained the approval for the clinical trial of insulin degludec-insulin aspart injections in June. The firm plans to apply for the approval of semaglutide injection and gastrointestinal hormone analogue for weight management once these two drugs are approved for lowering blood glucose.
Financials and valuation
We lower our 2022 EPS forecast 5% to Rmb0.71, given the firm’s rising R&D expenses and capex. We maintain our 2023 earnings forecast. The stock is trading at 4.5x 2022e and 4.1x 2023e P/E. We maintain OUTPERFORM but cut our TP 12% to HK$5.5, implying 6.6x 2022e and 6.1x 2023e P/E with 49.1% upside, due to the falling average valuation of H-shares.
Risks
Disappointing R&D progress; slowing sales growth of insulin products; falling prices of intermediates.