3Q22 earnings beat. Joinn reported 3Q22 revenue of RMB500mn, up 55% YoY (35%/52% YoY for 1Q/2Q22), and attributable net income of RMB261mn, up 177% YoY (34%/307% YoY for 1Q/2Q22). Attributable net income in 3Q22 accounted for 32% of our full-year estimate, compared with 17%/17% in 3Q21/3Q20. Gross profit margin in 3Q22 reached 50.9%, improved by 2.9ppts YoY and 3.3ppts QoQ, indicating efficient cost management despite the continuous price hikes of experimental animal models, indicating Joinn’s strong pricing power to its customers. Due to the increasing price of non-human primates, fair gains from biological assets accounted for a significant 37% of Joinn’s pre-tax profit in 3Q22 (30%/19% in 1H22/2021). Excluding unrealized fair value gains from biological asset, interest income, foreign exchange changes and other non-recurring items, adjusted attributable net income would increase by 71% YoY in 9M22. In 3Q22, new order signed by Joinn increased by c.40% YoY and the Company aims to reach 40% YoY growth in new orders for full-year 2022, indicating solid earnings growth for Joinn in the coming year and healthy demand in DSA services in China. In Aug 2022, Joinn announced to roll out a new round of share-based compensation scheme, with revenue CAGR target set at no lower than 35% during 2021-24E.
　　Enhanced order fulfilment capabilities with acquisitions of research　animal suppliers. Driven by the explosive pharmaceutical R&D innovations in China, the lack of high-quality research animal models has become a big bottleneck for CXO companies to provide drug safety assessment (DSA) services since 2019. Joinn completed its RMB1.8bn acquisition of two China-based leading suppliers of high-quality experiment models in 1H22, adding a total livestock of over 20,000 non-human primates. As a result, we have observed a continuous acceleration in Joinn’s revenue growth from 2Q22. Meanwhile, Joinn can better control its operating costs with its abundant livestock of research animals, which has led to margin improvement given the growth in adjusted attributable net income has outpaced that of revenue in 9M22 (71% YoY vs 49% YoY). We expect Joinn will continue to enhance its leading position in China DSA market.
　　Expanding capacities to accommodate the rapidly-growing demand.Joinn’s 8,000sq.m facilities in Suzhou have commenced operation in Jan 2022 and another 20,000sq.m. animal rooms in Suzhou will be ready for operation in 2H22. Besides, the Ph 1 of Guangzhou facilities (18,000sq.m.) may complete construction by end-2022. Joinn Yichuang, a subsidiary focusing on drug screening, has started the construction of laboratories, which may bring synergies to DSA services going forward.
　　Maintain BUY. We revise our TP from HK$78.98 to HK$53.61 based on a 10-year DCF valuation (WACC: 10.9%, terminal growth rate: 3.0%).