Tonghua Dongbao's 1H23 earnings were in line with expectations. Overall, insulin products showed good growth momentum, with continued market share gains for second- and third-generation insulins. The diabetes and gout pipelines progressed in an orderly manner, and the internationalization process advanced steadily, which could be new drivers of long-term growth. Expense ratios in 1H23 were down across the board, due to good cost control. Given the Company's long-term development potential, we assign 22x 2023E PE to derive a target price of Rmb12 and reiterate the "BUY" rating.
1H23 earnings in line with expectations.
Tonghua Dongbao reported 1H23 revenue/net profit/ex-one-off net profit of Rmb1,366mn/485mn/480mn, -1.53%/-59.00%/+8.75% YoY. For 2Q23, its revenue/net profit/ex-one-off net profit stood at Rmb701mn/234mn/233mn, +40.18%/-33.30%/+346.90% YoY. Attributable net profit has fallen sharply in 2023, mainly because of a gain in the stake sale in Amoytop Biotech in the same period last year, whereas ex-one-off earnings are in line with expectations.
Overall, insulins show good growth momentum. Third-generation insulin continues to grow sales and gain market share.
1) Biological products (active pharmaceutical ingredients and formulations): Revenue dropped 0.34% YoY to Rmb1,164mn, and gross margin fell 1.59ppts YoY to 82.85%, mainly due to the price reduction brought by centralized procurement. 2) Medical devices (insulin pens and test strips): Revenue was Rmb143mn, -10.22% YoY. 3) Traditional Chinese and chemical medicines: Revenue was Rmb39mn, +1.82% YoY. 4) Plastic-steel windows & profiles/real estate: Revenue was Rmb453.2k/3,397.3k, +108.00%/-47.26% YoY. The Company's insulin sales for the reporting period were good and market share was increasing. The Company recorded double-digit YoY growth in insulin sales in 1H23. According to PharmCube data, the Company increased its human insulin market share to 44.6% in 1H23 (2022: 40.5%), ranking No. 1 in the country; its insulin glargine market share reached 7.7% (2022: 5.9%); its insulin aspart and premixed insulin aspart continued to ramp up quickly. The product mix improved further with a continued rampup in third-generation insulin sales.
The R&D pipeline advances rapidly, and internationalization progresses steadily.
In 1H23, the Company's R&D expenses declined by 24.84% YoY to Rmb45mn, mainly because costs of the R&D projects that met capitalization criteria were capitalized as development costs.
—The Company is making NDA progress on several products: Both liraglutide and empagliflozin NDAs (new drug applications) have been accepted for regulatory review and the Company expects to market them by the end of this year.
—As many of its products make clinical progress, the Company's diversified pipeline may create new momentum for future growth. 1) Third- and fourth-generation insulins: For insulin lispro 25R, phase III clinical trial summarization is underway. Ultra-rapid lispro is in the process of phase III clinical screening and enrollment. BC Combo, a soluble insulin glargine/lispro injection, has obtained clinical approval in China and is in phase I trials in Germany. Insulin degludec has received clinical approval in China. 2) Insulin analog and GLP-1RA co-formulations: An investigational new drug (IND) application for the insulin degludec and liraglutide injection has been accepted. 3) Novel diabetes drugs: The first subject has been enrolled in the phase I clinical trial of the SGLT1/SGLT2/DPP4 triple-target inhibitor. INDs have been accepted for the GLP-1/GIP dual-target agonist and the oral, non-peptide, small molecule GLP-1 receptor agonist. 4) Novel gout drugs: The phase IIa database lock and unblinding have been completed for the URAT1 inhibitor. The XO/URAT1 dual-target inhibitor is in phase I clinical trials.
-Internationalization: The European Medicines Agency has accepted the Company's NDA for human insulin. The Company has filed applications for insulin glargine in several developing countries and is preparing to file applications for insulin aspart in several countries. Internationalization is advancing steadily, which should support earnings growth ahead.
Expense ratios are down YoY due to good cost control.
In a sign of good cost control, the Company's selling/administrative/financial expense ratios were 29.22%/5.97%/-0.48% for 1H23, down 3.65/0.84/0.01ppts YoY. Specifically, selling expenses were down 12.48% YoY, as the Company continued to optimize selling expenses; administrative expenses were down 13.69% YoY, largely driven by reduced amortization YoY of equity incentives. In 1H23, net operating cash flows declined by 43.89% YoY to Rmb322mn, mainly due to a YoY decrease in the money received from sales of goods (which we attribute to seasonal changes).
Potential risks:
Slower-than-expected rampup in sales after centralized procurement drives down costs; disappointing new product marketing; slower-than-expected R&D; and international geopolitical tensions.
Investment recommendation:
A domestic insulin leader and pioneer in chronic disease management, the Company reported earnings in line with expectations for 1H23. Overall, insulins have shown good growth momentum with continued market share gains. With the rapid rampup in third-generation insulin sales have come a continued improvement of the product mix. Orderly progress in the R&D pipeline has guaranteed long-term growth potential. Overall, we maintain our 2023E-25E EPS forecasts of Rmb0.55/0.66/0.79 for the Company. Several of the Company's innovative drugs in the fields of weight loss and hyperuricemia have entered the clinical stage, and the fastest progress is in clinical phase II. If approved for marketing, the chronic illness related drugs would deliver earnings growth momentum longer-term. We tweak our target price to Rmb12 on 22x 2023E PE and reiterate our "BUY" rating, given the average comps valuation of 12x PE (10x PE for Changchun High & New Technology (000661.SZ) and 14x PE for Livzon Pharma (000513.SZ) based on Wind consensus estimates) and the Company's good growth and visibility in the long run.
