Zhongtai: Pharmaceutical industry chain momentum continues; AI4S expected to drive further valuation re-rating

Zhongtai released a research report stating that in the first three quarters of 2026, multiple CRO and CDMO companies deployed AI. For example, WuXi AppTec's testing business accelerated "HI+AI" integration to capture the rapidly growing dry-wet closed-loop demand from global AI4S clients, while Joinn Laboratories' AI pathology image reading and organoid platforms are extending toward the front end of drug discovery, with incremental AI candidate molecules directly driving safety assessment demand. It is expected that as AIDD projects continue to extend toward the back end, this is likely to bring strong growth momentum to the sector over the medium and long term. 2026Q3 continued strong growth, demand side remains robust, AI4S is expected to drive continued valuation re-rating: 1) 2026Q3 showed a continued improvement trend: 2026Q1-Q3 revenue for key CRO and CDMO names in the sector +21.8%, net profit attributable to parent +36.3%, non-GAAP net profit +53.6%. By quarter, 2026Q3 revenue +24.9%, net profit attributable to parent +84.5%, non-GAAP net profit +44.8%, showing a sustained rapid growth trend. 2) Demand side remains strong: In 2026, orders at CRO and CDMO companies continued to grow rapidly. For example, WuXi AppTec's backlog for continuing operations in 2026Q1-Q3 increased +36.4% year on year, Pharmaron Beijing's newly signed orders +30% year on year, Joinn Laboratories' cumulative newly signed orders +109% year on year; Shanghai InnoStar Bio-tech +183.27% year on year. 3) Supply side returns to an expansion cycle: 2026Q1-Q3 sector fixed assets +6.9%, construction in progress +12.9%. Zhongtai expects this is mainly due to continued demand recovery, with industry capacity gradually tightening. 4) AI4S: In the first three quarters of 2026, multiple CRO and CDMO companies deployed AI. For example, WuXi AppTec's testing business accelerated "HI+AI" integration to capture the rapidly growing dry-wet closed-loop demand from global AI4S clients, while Joinn Laboratories' AI pathology image reading and organoid platforms are extending toward the front end of drug discovery, with incremental AI candidate molecules directly driving safety assessment demand. Zhongtai expects that as AIDD projects continue to extend toward the back end, this is likely to bring strong growth momentum to the sector over the medium and long term. 5) Profitability: Gross margin and net margin both trended steadily upward. In 2026Q1-Q3, the sector's overall gross margin was approximately 43.6% (+4.2pp), and net margin approximately 25.0% (+2.7pp). Investment recommendation: Industry chain momentum continues, AI4S is expected to drive continued valuation re-rating, actively capture the new round of R&D and production expansion cycle: 1) CRO: Since 2024, although monthly overseas CPI data have fluctuated, expectations for improved financing are likely to improve marginally, and order recovery has already been seen at some companies. Combined with the gradual acceleration of AI4S demand, Zhongtai expects overseas-demand CROs are likely to see a Davis double-play opportunity in earnings and valuation, and recommends close attention; The clinical CRO sector is benefiting from domestic innovative drug policy support and an improved financing environment, and the sector's reversal trend is likely to continue, and continued close attention is recommended; Along with the booming domestic innovative drug sector, domestic preclinical CRO orders continue to grow rapidly, and subsequent business is expected to gradually materialize, and active capture is recommended. 2) CDMO: Driven by continued downstream technological breakthroughs and a new round of commercialization for chemical drugs, development and production demand for peptide, oligonucleotide, XDC, and bispecific antibody CDMOs is expected to rise rapidly. Continue to watch investment opportunities in related industry chains.