Peptide business becoming a new growth driver

（以下内容从招银国际《Peptide business becoming a new growth driver》研报附件原文摘录）
药明康德(603259)
WuXi AppTec reported 3Q23 revenue of RMB10,670mn, up 0.3% YoY, andattributable recurring net income of RMB2,948mn, up 23.8% YoY, with attributableadjusted non-IFRS net income of RMB3,072mn, up 24.3% YoY. 3Q23 revenueaccounted for 25.6% of our 2023 full-year estimate, in line with its historical average,while attributable adjusted non-IFRS net income represented 29.1% of our forecast,higher than its historical average of c.26%. In 9M23, non-IFRS gross profit margin(GPM) improved by 3.6ppt to 42.3% while non-IFRS net profit margin increased by3.7ppt to 27.6%, driven by favourable currency exchange rates and continuouslyimproved operating efficiency. As of Sep 2023, overall backlog increased by 25% YoY,if excluding commercial COVID-19 projects, per management. Considering the weakdemand in early-stage discovery services, management revised down the full-yearrevenue YoY growth target from 5-7% to 2-3%, which now implies non-COVIDrevenue growth of 25-26% YoY in 2023E. Nevertheless, management slightly raisednon-IFRS gross profit margin target by 0.5% to 41.7-42.1% for 2023E to reflect thefurther improved operating efficiency. Additionally, management has proposed toterminate the 2023 H-share incentive plan, and to repurchase and cancel over 15.5mnH-shares (~0.52% of total share capital) with a value of HK$1.3bn.
Healthy growth from non-COVID projects. Excluding commercial COVID-19projects, 9M23 revenue of WuXi AppTec would grow by 23.4% YoY, primarilydriven by the 48.2% YoY growth of the D&M services within its chemistry segment.Based on our calculation, in 9M23, the Company booked c.RMB3.0bn revenuefrom commercial COVID projects. In addition, the management expected theweak global demand in early-stage R&D services to be temporary and is confidentin the Company’s long-term growth outlook. The management indicated WuXiAppTec’s revenue to grow more than 20% YoY in next few years (excluding theimpact of commercial COVID projects).
TIDES business to become the next growth driver. We believe the promisingTIDES (mainly oligo and peptides) business will become a major growth driver forthe Company. In 9M23, TIDES revenue grew by 38.1% YoY, on top of 337% YoYgrowth in 2022. More excitingly, backlog of TIDES as of Sep 2023 dramaticallyincreased by 245% YoY, leading to the management guidance of over 60% YoYgrowth in TIDES revenue 2023E and another 60%+ YoY growth in 2024E. Toaccommodate the rapidly growing demand of peptide drugs, WuXi AppTec aimedto increase its solid phase synthesizer capacity for peptide production to 32,000Lby the end of 2023, one year ahead of its original schedule. We expect theCompany to generate meaningful future revenue from providing CMO services fora blockbuster dual-targeted GLP-1 product. We expect the Company to capturethe growing opportunities in the global peptide market given its sizable peptidemanufacturing capacities and strong global customer network.
Maintain BUY. Our TP remains largely unchanged at RMB116.01, based on a10-year DCF model with WACC of 10.73% and terminal growth of 2.0%. Weforecast WuXi AppTec’s revenue to grow by 2.8%/ 17.2%/ 23.5% YoY andadjusted non-IFRS net income to grow by 15.2%/ 17.8%/ 24.7% YoY in 2023E/24E/ 25E, respectively.