HANGZHOU TIGERMED(3347.HK)：1H24 RESULTS WEAK DUE TO INTENSE COMPETITION;GEOPOLITICAL RISKS CANNOT BE IGNORED-格隆汇

机构：中银国际
研究员：Linda LU/Dolores Tang

Tigermed reported 1H24 revenue down 10% YoY and adj.NP falling 19% YoY. Revenue from Clinical Trial Solutions dropped 22% YoY, mainly due to reduction in unit price for new orders, resulted from intensified competition. Additionally, we anticipate that geopolitical tensions will have a negative impact on China's leading clinical CROs, such as Tigermed, which generates 44% of its revenue from overseas markets. As a result, we project a significant 30% decrease in revenue by 2026, reflecting the potential effects of the Biosecure Act. Consequently, we have lowered our earnings forecasts by 43%-70% for 2024-26. Following an increase in the WACC and a reduction in the terminal growth rate, we have derived a new TP of HK$39. Maintain BUY based on Tigermed’s strong domestic market position.
Key Factors for Rating
Revenue and profitability decline: Tigermed reported 1H24 revenue of c.RMB3.4bn, down 10% YoY, and declined as well if excluding COVID-related handover fee. Revenue from Clinical Trial Solutions was c.RMB1.6bn, a 22% YoY decline, driven by a reduction in unit prices amid fierce competition during an industry downcycle. Conversely, revenue from Clinical Related and Laboratory Services grew 6% YoY to c.RMB1.7bn, bolstered by robust growth in site management and steady gains in data management and statistical analysis. Domestic business revenue in 1H24 accounted for 56% of total revenue, consistent with 1H23 figures. GPM for 1H24 slightly declined by 0.2ppt to 39.7%, while adj.NP decreased 19% YoY to RMB640m.
Persisted momentum in new orders: The trend in new order signings continued in 1H24, driven primarily by domestic clinical trial demand from global pharmaceuticals and overseas clinical trial demand from Chinese biotech startups. Although orders from domestic customers stabilised with higher volumes, the total value grew at a modest low-single-digit rate due to fierce price competition. The overall YoY growth rate for newly signed orders in 2Q24 reached high double digits, accelerating from mid-double digits in 1Q24, leading to a consolidated YoY growth rate in 1H24 in the mid-to-high double digits. Mgmt. indicated that this trend persisted throughout July and August.
Earnings pressure amid geopolitical tensions: We foresee potential negative impacts on China's leading clinical CROs, including Tigermed, due to ongoing geopolitical tensions. With 44% of its revenue derived from overseas, we forecast a 30% revenue decline by 2026E to account for the Biosecure Act’s implications. Consequently, we have reduced our earnings forecasts by 43%- 70% for 2024-26.
Key Risks for Rating
(i) Intense competition; (ii) reduced R&D investment; (iii) geopolitical risks.
Valuation
We use DCF model to value Tigermed. Given the intense price competition among domestic clinical CROs and heightened geopolitical risks, we raised WACC from 12.7% to 13.9% and lowered terminal growth rate from 3.5% to 2.5%. Our 10-year DCF model yields a new TP of HK$39. We maintain our BUY rating, based on Tigermed’s leading position in the domestic market.