Zhongtai: Dawn is expected to arrive. Actively grasp the bottom opportunities of the CRO and CDMO sectors.

Zhongtai released a research report stating that due to the continuous rapid increase in downstream single product sales, the demand for chemical large molecules CDMO such as peptides and nucleic acids CDMO is expected to increase rapidly, and investment opportunities in the related industry chain are promising; as global investment and financing gradually recover, and front-end projects continue to extend to the back end, small molecule CDMO is expected to gradually recover. The bank pointed out that since 2024, although there have been fluctuations in overseas CPI monthly data, overseas interest rate cuts are expected to gradually progress, improvement in investment and financing expectations is expected to marginally improve, and some companies have seen recovery in orders in the first three quarters, it is expected that integrated CRO/CDMO mainly with overseas income and domestic preclinical CRO are expected to see valuation repair opportunities; due to the larger impact of the domestic and international investment and financing environment on the CRO sector, but with the gradual reinforcement of domestic policies, it is expected that the sector will gradually recover, and continued attention is placed on investment opportunities in clinical CRO. Zhongtai's main points are as follows: The growth of the sector was slightly slowed down by disturbance of large order base in 2024 Q1-Q3, with gradual improvement in revenue in 2024 Q3, gradual turnaround in demand, and expectation of gradual clearance on the supply side. 1) Gradual improvement in revenue in Q3: Core target sectors of CRO and CDMO in 2024 Q1-Q3 -7.9% in revenue, -33.8% attributable to the parent company, -31.3% non-GAAP. By quarter, revenue in 2024 Q3 decreased by 2.2%, attributable to the parent company decreased by 28.2%, non-GAAP decreased by 31.0%, showing a trend of gradual improvement compared to 2024 Q2. 2) Continued turnaround in demand: due to the gradual recovery of global investment and financing in the first half of 2024, significant recovery in in-hand orders of some companies mainly relying on overseas income in 2024 Q1-Q3, such as WuXi AppTec with in-hand orders +35.2% in 2024 Q1-Q3, Porton Pharma Solutions +40% or more, and new signed orders for Pharmaron Beijing increasing by more than 18%. 3) Expectation of gradual clearance on the supply side: Fixed assets in the sector increased by 7.4% in 2024 Q1-Q3, while ongoing projects decreased by 6.7%, both showing a slowdown in growth compared to the past three years. 4) Profitability: Gross profit margin, net profit margin, and non-GAAP net profit margin fluctuated slightly, with the overall gross profit margin of the sector in 2024 Q1-Q3 at approximately 38.6% (-3.7pp), and the net profit margin and non-GAAP net profit margin were approximately 16.9% (-6.6pp) and 15.8% (-5.4pp) respectively. 5) Valuation at historical lows: Since the fourth quarter of 2021, the sector has experienced adjustments due to geopolitical games, fluctuations in investment and financing, repeated outbreaks of epidemics, policy disturbances, and other factors affecting pessimistic expectations. As of November 15, 2024, the average PE ratio of core targets in 2024 was approximately 24.6 times, which is discounted by approximately 65.6% compared to the five-year average PE ratio (TTM), and current valuation levels are at historically low levels. Risk events: The research report may be based on public information that could be outdated or not updated in a timely manner, risks of new drug research and development failures, exchange rate fluctuations, environmental protection and safety production risks, risks of certain selection bias in data samples, or deviations from the actual situation.