On August 7, the Hang Seng Index Company announced that there are signs of improvement in the biotech sector recently, thanks to policy support and continuous inflow of funds for the past 3 months. With more policies being introduced, the Hang Seng Hong Kong-listed Biotech Index has outperformed the market since July.

Clearly, the positive changes revealed in the article from Hang Seng provide investors with a new perspective, which may also indicate a new turning point for the entire pharmaceutical sector.

In the current situation where the entire sector is still undervalued, the recent financial reporting season for pharmaceutical companies provides a window of opportunity for evaluating company value and forecasting future development in the market.

Recently, Dongyao Pharmaceutical (1875.HK), which released its interim report, demonstrated impressive operational performance. How should we interpret the company's performance?

1. Highlights of the financial report: significant transformation achievements, turning losses into profits.

Summarizing the highlights revealed in the company's financial report, we can look at the following aspects.

Firstly, strong revenue growth and impressive achievement of turning losses into profits.

In the first half of the year, Dongyao Pharmaceutical achieved a revenue of 0.52 billion yuan, a year-on-year growth of 59%, demonstrating strong overall business growth. The growth of product sales revenue is particularly prominent, with a year-on-year increase of 44%, mainly due to the sustained hot sales of the core product Bevacizumab injection Potention, showing the company's strong core foundation.

It is worth noting that the company achieved a transformation from loss to profit during the period, with a net income of 31.559 million yuan in the first half of the year. This transformation not only reflects the company's profit capability but also enhances the market's confidence in the company's future development.

Again, the company's hematopoietic ability has performed well.

The company's hematopoietic ability continues to be strengthened, and the net cash flow from operating activities continues to show a positive trend. The data shows that the net cash flow from operating activities in the first half of the year amounted to 27.801 million yuan, demonstrating the company's excellent cash flow management and fund operation capability.

The core highlight of this financial report lies in the significant achievements of the company's strategic transformation.

This is directly reflected in the strong growth of the CDMO/CMO business segment.

In the first half of the year, this business sector achieved a revenue of 0.114 billion yuan, a year-on-year increase of 144%. Under the exponential growth, it is evident that the company has successfully nurtured explosive growth points.

The transformation achievements are also reflected in the significant increase in the company's CDMO projects, as well as the certainty they bring for the future.

The financial report shows that the company added 20 new projects in the first half of the year, bringing the total to 115, including 17 ADC projects. At the same time, 2 new pre-BLA (pre Biologics License Application) projects were added, totaling 8 on hand. These projects will directly relate to the future commercial production of the products, providing the company with a clear path for performance growth and enormous commercialization potential.

In addition, the company has signed unfinished orders amounting to 0.184 billion yuan, a year-on-year growth of 104%. This significant achievement not only demonstrates the strong driving force of the company's business, but also provides a guarantee for the stable growth of future revenue.

Once again, Dongyao Pharmaceutical has shown its firm determination and strategic vision in talent allocation and team building, which is also an important highlight of its transformation achievements.

Dongyao Pharmaceutical has achieved rapid expansion in the CDMO field and continuous optimization of its talent structure. According to the financial report, compared with the same period last year, the number of CDMO team members has grown by 29% to reach 492 people, accounting for 86% of the total number of employees in the group. At the same time, in its focused core segment of ADC CDMO, the team size has also increased by 27% year-on-year. These data reflect the company's emphasis on and investment in the CDMO business.

Finally, the transformation achievements are also reflected in the continuous acceleration of the company's quality management system and its multiple international accreditations.

The company has a high standard of quality management, ensuring high standards and quality of its products and services. Its quality management system is able to meet Chinese, American, and European GMP standards, and has gained wide recognition from the industry at home and abroad. This also provides a passport for its products and services to enter the international market and helps the company expand its global business.

In addition, the company has undergone frequent GMP audits, further demonstrating the stability and reliability of its quality management system. Data shows that as of June 30, 2024, it has undergone more than 60 GMP audits, including zero defects passing the EU QP audit, direct pass of site inspection by Colombian official GMP audit, as well as audits by Indonesia, Egypt, and other countries. The company has also cooperated with customers to successfully complete inspections by multinational pharmaceutical companies and institutional inspections, and has achieved authorization and high recognition.

In the fiercely competitive pharmaceutical market, quality is the key for companies to stand out. Dongyao Pharmaceutical continues to improve its quality management system, and its achievements fully demonstrate its excellent performance in quality management. This will help the company attract more investment and cooperation opportunities and further promote the development of its business.

Overall, Dongyao Pharmaceutical's financial report reveals highlights in multiple aspects, which not only demonstrate the company's current operational strength but also provide solid support for its continuous development and market competitiveness in the future.

Under the triple bottom overlay, is it ahead of the industry's recovery confidence?

In the capital markets, the valuation of the pharmaceutical sector is often affected by various factors, and the pharmaceutical sector is currently experiencing a situation where the policy bottom, fundamental bottom, and sentiment bottom are superimposed.

From the perspective of policy bottom, with the continuous policy support from the government for the pharmaceutical industry, it has provided a stable external environment and development opportunities for the industry.

So far this year, it can be seen that policies supporting pharmaceutical innovation have been frequently introduced in many regions, promoting the high-quality development of innovative drugs in an all-round way. Just earlier on July 30, Shanghai also released the "Opinions on Supporting the Full Chain Innovation and Development of the Biomedical Industry," which has sparked enthusiastic market response. The policy support for innovative drugs will obviously bring new opportunities for the CXO industry, as well as the sector as a whole.

From the perspective of fundamental bottom, the entire pharmaceutical industry has shown relatively weak performance in recent years. However, with the optimization of industry structure and the improvement of innovation capabilities, the fundamental situation of the pharmaceutical sector is gradually improving, and those directions with sustainable profitability are becoming the focus of capital allocation.

From the perspective of sentiment bottom, after experiencing a long-term low market environment, market confidence in the pharmaceutical sector is gradually returning. The recovery of investor sentiment will provide momentum for the valuation repair of the sector.

In this context, Dongyao Pharmaceutical, as a member of the pharmaceutical sector, has demonstrated its unique advantages in the industry, especially with the fundamental changes that have accompanied its transformation. This has brought the market an opportunity to reevaluate the company's value growth.

From the company's series of actions, since its full transformation to a biopharmaceutical CDMO in 2020, the company has established a brand-new growth point in the CDMO field, which has been continuously validated.

Looking ahead, in conjunction with the industry background, with the increasing demand for global pharmaceutical research and development outsourcing services, Dongyao Pharmaceutical's CDMO business is expected to further expand its market share and become a strong engine to help the company continuously reach new heights of revenue. At the same time, the company has cooperated with customers multiple times to complete the overseas authorization of pharmaceuticals, laying a solid foundation for the company's expansion into international markets.

Taking a closer look at Dongyao Pharmaceuticals' focus on biopharmaceuticals and its efforts in the ADC track, Dongyao Pharmaceuticals has already established a high-standard, integrated commercial production line for antibodies, ADC raw materials, and formulations, as well as a cutting-edge ADC CDMO technology platform, demonstrating the company's professional capabilities and technical strength in the field of biopharmaceuticals, especially ADC. Considering the high technical barriers to the research and production of ADC drugs, Dongyao Pharmaceuticals has established a competitive advantage in the ADC CDMO field with its high-standard production line and technology platform, solidifying its market position in biopharmaceutical CDMO.

Biopharmaceuticals, as an unquestionably hot field at present, have a broad future in the ADC market. According to Frost Sullivan's statistics, the global ADC market is expected to grow from $7.9 billion in 2022 to $64.7 billion in 2030, with a high compound growth rate of 30.0%. Along with the rapid development of the ADC track, it will also provide ample incremental space for the ADC CDMO business market. As Dongyao Pharmaceuticals, deeply involved in the field, will undoubtedly continue to benefit.

In summary, the triple bottom formation has brought about an opportunity for a turnaround in the pharmaceutical sector, and Dongyao Pharmaceuticals, with its core competitiveness in the industry and comprehensive advantage in the ADC track layout, has the potential to outperform the industry's recovery. With the improvement of the market environment and the enhancement of the company's own strength, Dongyao Pharmaceuticals is expected to achieve resonance between performance and valuation.

In conclusion, the results achieved in the first quarter demonstrate that AI capabilities have brought new opportunities to the company. With the continuous increase in the penetration rate of large models, continuous enhancement of product performance, diversification of landing scenarios, and further expansion of overseas business, Cheetah Mobile is expected to welcome a broader development space.

Through a deep analysis of Dongyao Pharmaceuticals and its pharmaceutical sector, it is clear to see the company's development potential and future prospects in the current market environment.

Dongyao Pharmaceuticals' core competitiveness, particularly its proactive layout in the field of biopharmaceutical CDMO, indicates that the company will occupy a more important position in the future pharmaceutical market.

With continuous growth in performance and increasing market recognition, the future market performance of Dongyao Pharmaceuticals is also expected to be highly anticipated.