TONGHUA DONGBAO(600867)3Q22 EARNINGS REVIEW：3RD GEN INSULIN SALES RAMPS UP RAPIDLY; CDP POSES SHORT-TERM PRESSURE

　　Core views:
　　The 1-3Q22 earnings of Tonghua Dongbao (THDB) were in line with expectations. It saw solid growth in 2nd and 3rd-generation insulin shipments, ranking the 3rd in sales to public hospitals. R&D pipeline has been advanced at an accelerated pace, with the buildup of its drug pipeline targeting diabetes and gout progressing smoothly. Due to price cuts tied to centralized drug procurement (CDP), THDB’s selling expense ratio rose slightly, though other expense ratios were largely well reined in.
　　Abstract:
　　Earnings were in line with expectations. THDB posted revenue/net profit/recurring profit of Rmb2,099mn/1,403mn/661mn during 1-3Q22, -14.50%/+31.39%/-26.65% YoY. In 3Q22 alone, it recorded revenue/net profit/recurring profit of Rmb712mn/220mn/220mn, -10.24%/-44.08%/-10.56% YoY. The 1-3Q22 results were in line with expectations, with the sharp rise in net profit driven by the increase in investment income tied to its sale of some equity stake in Amoytop Biotech (688278.SH). The relatively big YoY drop in net profit in 3Q22 was mainly due to the impact of price cuts tied to its main products under CDP this year. The Company also sold some equity stake in Amoytop Biotech in 3Q21, resulting in a relatively high net profit base, which contributed to the net profit drop in 3Q22 as well.
　　THDB saw solid growth in 2nd and 3rd-generation insulin shipments, ranking the 3rd in sales to public hospitals. The Company ramped up insulin and insulin analog shipments at a solid pace after winning CDP bids. In particular, its insulin shipments saw high single-digit growth while insulin analog sales logged more than 100% growth. THDB’s insulin glargine has already been available at more than 11,000 hospitals across the country and its insulin aspart has been approved to sell by over 3,000 hospitals. Thanks to its continuous efforts, the Company’s share of insulin and insulin analog sales at domestic public medical institutions reached 10.83% in 1H22, ranking the 3rd in the industry, per data of menet.com.cn. Relying on high-quality products and after-sales services, brand influence built up over the years and continued rampup in channel and market spending, THDB will likely see a further expansion in both product sales and market share, thereby gradually shaking off the negative impact of the CDP.
　　R&D pipeline has been advanced at a faster clip, with the buildup of its drug pipeline targeting diabetes and gout progressing smoothly The Company’s R&D expenses reached Rmb112mn during 1-3Q22, down 5.07% YoY; and R&D expense ratio rose 0.53ppts YoY, highlighting solid controls. Thanks to continuous R&D spending, its R&D projects for treatment of diabetes and other diseases have all made progress. THDB has obtained the drug registration certificate for its repaglinide tablets, further broadening its product pipeline targeting diabetes, which also points to desirable synergies with its existing products. In addition, the Company has also obtained the approval for the clinical trials of its ultra-long-acting insulin analog degludec. It was the first domestic drugmaker to submit such an application in this space. In terms of gout treatment, the Company has also made progress as it has already filed an IND application for its original dual-target drug THDBH151. The Company's aspart 30/50 and liraglutide injections will likely be approved for marketing in 4Q22 and late next year, respectively. Subsequently, a few more products will likely enter clinical trials or see applications for clinical trials. Its broad and diverse pipeline will likely provide new impetus for future growth.
　　Selling expense ratio rose slightly but other expense ratios were largely well reined in. Selling/administrative/financial expense ratio was 32.71%/6.35%/-0.45% during 1-3Q22, +3.27/-0.47/-0.20ppts YoY. Except for the selling expense ratio, all other expense ratios remained largely stable. The slight rise in selling expense ratio came as its revenue was affected by price cuts tied to the CDP and it had to continue to maintain high selling expenses in order to compete for the remaining ~50% procurement orders in the free market. Net operating cash flow was Rmb809mn during 1-3Q22, up 0.63% YoY, highlighting steady cash flow.
　　Potential risks: Disappointing rampup in product shipments following CDP price cuts; new product promotion missing expectations; slower-than-expected new product R&D.
　　Investment recommendation: THDB is a leading insulin supplier and a forerunner in the field of chronic disease management in China. Rapid growth in insulin glargine and insulin aspart sales continue to help optimize its product mix. Orderly advances in its R&D pipeline will help ensure its long-term growth potential. Taking into account 3Q22 results, relatively moderate CDP price cuts, rapid rampup in its 3rd-generation insulin shipments and a continued rise in the share of its revenue from 3rd-generation insulin products, we adjust our 2022E/23E/24E EPS forecast to Rmb0.79/0.61/0.68 (previous: Rmb0.80/0.58/0.65). Considering comparable peers’ PE valuations (an average of 16x 2022E PE per Wind’s consensus estimates, with Changchun Hi-Tech (000661.SH) at 15x and Livzon Pharmaceutical (000513.SZ) at 18x) and the fact that 2022 marks the first year of its CDP implementation (factoring in the impact of CDP price cuts on its earnings and related profit pressure in the short term), we value THDB at 14x 2022E PE and maintain a target price of Rmb11 to reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。