2023 earnings robust, 1Q24 saw slight disturbance
Hualan New Pharmaceutical Material (HLNPM) logged robust earnings growth in 2023, posting revenue/attributable NP/recurring attributable NP of RMB620/120/70mn (+7/+26/+2% yoy) in 2023 and RMB130/10/4mn (-19/-68/-81% yoy) for 1Q24. We attribute the earnings decline in 1Q24 mainly to destocking activities among customers and the high volume of pandemic-related orders in 1Q23. We anticipate earnings recovery in the following quarters as the disruptions from destocking activities and pandemic-related orders diminish. We foresee additional growth from new order acquisitions as new capacity comes on stream. We estimate its 2024/2025/2026 attributable NP at RMB130/170/240mn, and value the stock at 28x 2024E PE, a discount to its Wind consensus-based peers’ median of 33x, to factor in the uncertainty of new order intake. Our target price is RMB28.82. Maintain BUY.
Existing biz.: robust revenue growth & sound customer expansion
HLNPM’s rubber stopper revenue was RMB620mn (+6.4% yoy) in 2023, with GPM dipping 2pp yoy to 41.6%. We anticipate rapid revenue growth in stopper business in 2024: 1) revenue from regular rubber stopper was RMB290mn (+11% yoy) in 2023, with segment GPM rising 2.8pp yoy, and we estimate the segment to grow steadily for 2024-2026; 2) revenue from laminated rubber stopper was RMB320mn (+3% yoy) in 2023, with segment GPM dipping 5.4pp yoy, mainly owing to adjustment in order structure and increased depreciation and amortization, in our view. We anticipate growing orders for high-end rubber stoppers should promote accelerated revenue growth of the business during 2024-2026; 3) the company has acquired 284 new customers in 2023, including Asymchem Laboratories, Yunnan Baiyao, Bloomage Biotech and STA Pharma, with 970/1,428 laminated/regular rubber stopper projects on hand, and issued 546 licenses, demonstrating robust order pipeline.
New offerings: capacity expansion on track, order intake promising
We expect HLNPM’s cartridge component and pre-filled packaging materials capacity to be gradually put into production, contributing to order acquisition from 2024 onwards: 1) Cartridge components: the company is advancing bundling review with leading pharmaceuticals and could enter supply chains of domestic enterprises with centralized procurement of insulin in the medium term, with a potential to benefit from sales ramp-up of in GLP-1 drugs in the long term. 2) Pre-filled packaging materials: construction of plants with annual capacity of 1.5bn piston caps and 10mn COC/COP assemblies is slated to be completed in September 2024, with demand growth supported by high-value drugs, while material iteration for assembly and localization of rubber stoppers should create new markets, in our view.
Risks: new projects failing to operate at full capacity as we expected; orders coming in slowly; product quality issues.