1H22 results beat our expectation
　　JOINN Laboratories (China) announced its 1H22 results: Revenue rose 45.33% YoY to Rmb777mn, attributable net profit rose 141.4% YoY to Rmb371mn, and recurring net profit grew 166.79% YoY to Rmb345mn. Excluding unrealized fair value gains of biological assets, interest income, and FX gains, recurring net profit rose 70.32% YoY, beating our expectation as strong demand for the main business drove rapid earnings growth.
　　Trends to watch
　　Recurring net profit grew strongly in 1H22. In addition to momentum from strong demand in the firm’s main business, the earnings growth was also boosted by: 1) unrealized and realized fair value gains of biological assets of Rmb120mn (vs. Rmb36.19mn in 1H21) and Rmb10.89mn (vs. Rmb1.58mn in 1H21); 2) Interest income of Rmb68.68mn (vs. Rmb2.65mn in 1H21); 3) FX gains of Rmb18.78mn (vs. Rmb1.65mn in 1H21).
　　Ample orders on hand ensuring visible earnings growth ahead. As of end-June 2022, the firm’s order backlog had exceeded Rmb4.1bn. Its new orders exceeded Rmb2.0bn in 1H22, with over Rmb1.8bn in orders for domestic subsidiaries (up over 50% YoY), Rmb0.2bn in overseas orders for Biomere (up about 30% YoY) and over 100% YoY growth in overseas orders for domestic subsidiaries (up over 100% YoY). The firm maintained strong order growth.
　　Expanding capacity and headcount; acquiring laboratory model companies. As of end-July 2022, the headcount of the firm’s service team had increased by nearly 500 compared with end-2021 to over 2,600. The firm in August 2022 announced its A-share employee share ownership program, which covers no more than 20 supervisors, members of senior management, and core technical (business) personnel. The unlocking conditions are linked to the firm’s financial results, and we think the employee stock ownership plan will incentivize its employees. The firm’s Phase I project of over 8,000sqm in Suzhou started operation in January 2022, and the Phase II project of about 20,000sqm is well on track. The firm expects construction of its Guangzhou facilities to be completed by end-2022. In addition, the firm acquired two laboratory model companies in June 2022, which had respective inventories and biological assets appraisal value appreciation of Rmb670mn and Rmb684mn in 2021.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts. The firm’s A-shares are trading at 52.1x 2022e and 40.2x 2023e P/E, and H-shares are trading at 24.5x 2022e and 18.9x 2023e P/E. Considering the recent sector correction, we maintain OUTPERFORM for A-shares but cut our target price 5.1% to Rmb101.50, implying 52.4x 2023e P/E with 30.3% upside. We maintain OUTPERFORM for H-shares, but cut our TP 6.3% to HK$60.00, implying 26.6x 2023e P/E with 40.7% upside.
　　Risks
　　Changes in fair value of biological assets; fluctuation in orders; R&D risks of new drugs; exchange rate fluctuations.