The Zhitong Finance App learned that with the end of the Federal Reserve's interest rate hike cycle, the gradual easing of liquidity is expected to bring about a recovery in investment and financing. Overseas demand will improve ahead of local demand. At the industry level, it is recommended to focus on 1) changes in the Federal Reserve's interest rate policy, 2) marginal changes in investment and financing, 3) the gradual recovery of overseas demand, 4) Sino-US relations and geopolitics, and 5) the introduction of policies to support the entire domestic innovative drug industry chain. In the future, innovative drug support policies may be introduced intensively, and the benefits of clinical CRO are strong. On the one hand, the competitive pattern of the domestic clinical CRO industry has not been completely solidified and there is a large space for internationalization. On the other hand, the trend of decentralization and diversification of domestic innovative drug targets is clear, and CRO with experience in related target projects is expected to continue to benefit.

It is recommended to focus on: 1) companies with a high growth rate of generic CXO orders, such as: Baicheng Pharmaceutical (301096.SZ), Sunshine Nuohe (688621.SH); 2) concept companies such as diet pills, Alzheimer's disease, ADC, and AI, such as Hongbo Pharmaceutical (301230.SZ) (AI theme); 3) clinical CRO companies, such as Tiger Pharmaceuticals (300347.SZ), Norsgate (301333.SZ), etc.

Pacific Securities's main views are as follows:

Negative growth in performance and weakening profitability

In the first quarter of 2023 and 2024, the CXO sector achieved operating income of 922.85 billion yuan and 19.571 billion yuan respectively, down 1.22% and 12.36% year on year, and achieved net profit of 176.92 billion yuan and 2,845 billion yuan, down 18.81 and 41.59% year on year. Revenue and profit all declined to varying degrees. The pressure on short-term performance was mainly related to the completion of delivery of large orders and cyclical adjustments in the CXO industry. The gross margins for the first quarter of 2023 and 2024 were 40.98% and 36.92%, respectively, with net margins of 19.17% and 14.54% respectively. Profitability declined mainly due to: 1) delivery of high-profitability COVID-19 orders, 2) poor overseas and local demand, declining capacity utilization and labor efficiency, and 3) rising cost rates during the period.

The adjustment cycle has arrived, and efficiency has decreased

Per capita income generation in 2023 was 775,200 yuan, down 0.33% year on year; profit generation per capita in 2023 was 148,600 yuan, down 18.08% year on year; fixed asset turnover declined, 2.17 times in 2023, down 19.79% year on year, and operating efficiency declined to a certain extent. The main reasons were: 1) Production capacity continued to expand during the 2015-2022 rise period, personnel and fixed assets continued to grow; 2) Revenue growth was weak or declined due to the completion of major COVID-19 orders and poor demand from the main business.

Orders are under pressure in the short term, and capacity construction is slowing

Demand side: The first quarter of 2023 and 2024 was 60.72 billion yuan and 6.630 billion yuan, respectively, down 14.08% and 19.78% year-on-year. The main reasons are: 1) the high base of COVID-19 orders; 2) the industry is currently at the bottom of the cycle; the growth rate of new orders is slowing or declining; 3) some Biotech customers were unable to continue to advance the pipeline due to financial pressure, and some orders were cancelled. Supply side: The pace of production capacity construction is slowing down. The number of projects under construction in 2023 was 15.301 billion yuan, up 3.49% year on year. The total number of employees in 2023 was 11,9045, down 0.89% year on year.

Pharmaceutical investment and financing were adjusted in stages, and the share of CXO fund holdings declined

In 2023, global and Chinese pharmaceutical financing amounts were divided into 413.3 and 78.5 billion yuan, down 18% and 27% year on year. The number of financing incidents was 3076 and 1,300 respectively, up 1% and 7% year on year. Investment and financing is currently in the phase of phased adjustment. In the future, as the Federal Reserve's interest rate hike cycle ends, it is expected that a new cycle will begin. Furthermore, the share of CXO fund holdings continued to decline, and the 2024Q1CXO holding ratio fell to 9.64%, down 1.42pp from 2023q4.

Risk warning: The Fed's interest rate policy falls short of expectations, investment and financing recovery falls short of expectations, increased market competition, and exchange rate fluctuations.