Summary of the Conference Call for 康龙化成 (Kanglong Chemical) Company Overview - 康龙化成 is a leading player in the pharmaceutical and biotechnology services industry, focusing on laboratory services, small molecule CDMO (Contract Development and Manufacturing Organization), and clinical services. Key Financial Highlights - In 2025, the company achieved revenue of 140.95 billion CNY, a year-on-year increase of 14.8% [3] - Adjusted net profit was 18.16 billion CNY, up 13% year-on-year, while net profit attributable to shareholders decreased by 7.2% due to significant investment gains in 2024 [3] - Revenue from the top 20 global pharmaceutical companies grew by 29.4%, accounting for 20% of total revenue [3] - New orders increased by over 14% year-on-year, with more than 950 new clients contributing approximately 4% to revenue [3] Business Segment Performance Laboratory Services - Revenue reached 81.59 billion CNY, a 15.8% increase year-on-year, with a gross margin of 44.7% [5] - The segment participated in 887 global new drug discovery projects, showing an increase from 2024 [5] - The growth was driven by the integration of AI and automation technologies, enhancing research efficiency [5] Small Molecule CDMO - Revenue was 34.83 billion CNY, up 16.5% year-on-year, with a gross margin of 33.8% [6] - The segment saw significant order growth, particularly in the second half of the year, with Q4 revenue reaching 11.9 billion CNY [6] - The number of late-stage projects increased significantly, with 47 Phase III projects and 34 commercial projects [7] Clinical CRO Services - The clinical business saw a slight increase in new orders, with overseas business achieving double-digit growth, accounting for over 35% of total revenue [14] - Domestic CRO and SMO services showed modest growth, with signs of price recovery in the market [14] Strategic Developments - The company made significant strides in commercialization, with API production facilities in Ningbo and Shaoxing passing FDA inspections, leading to the approval of its first commercial API for the U.S. market [3][12] - A major commercial agreement was signed with a multinational corporation for the production of oral small molecule GLP-1 formulations [3] - The ADC (Antibody-Drug Conjugate) production facility has been launched, and a new large-scale peptide API solid-phase synthesis facility is expected to be completed by 2026 [6][11] Market Outlook - For 2026, the company projects revenue growth of 12% to 18%, with a strong order pipeline and expected acceleration in CDMO revenue growth [8][15] - The company anticipates that the CDMO segment will continue to outpace overall company growth, with further improvements in revenue share and profitability [8][10] - The company is well-positioned to leverage its integrated service platform and technological advancements to attract more clients and enhance service delivery [15] Risks and Challenges - Potential impacts from currency fluctuations, particularly the appreciation of the RMB against the USD, are acknowledged, but the company expects revenue growth to offset these effects [8][15] - The clinical business may still be influenced by low-priced orders signed in previous years, affecting revenue in 2026 [14] Conclusion - 康龙化成 demonstrated robust growth in 2025, with strong performances across its core business segments. The company is optimistic about its future prospects, driven by a solid order backlog and strategic partnerships, despite facing some external economic challenges [16][17]

Investment Rating - The report maintains a "Buy" rating for both A and H shares of the company [7] Core Insights - The company achieved a revenue of 1.658 billion RMB and a net profit attributable to shareholders of 298 million RMB in 2025, reflecting a year-over-year change of -17.9% and +302.1% respectively, aligning with performance forecasts [1] - The company has seen a significant increase in new order amounts, with 4Q25 new orders reaching 960 million RMB, a year-over-year increase of 118.2%, indicating a recovery in domestic industry demand [1] - The company’s gross margin for 2025 was 20.7%, down 7.7 percentage points year-over-year, primarily due to the impact of low-quality orders from previous periods [2] - Operating cash flow improved significantly, with a net cash flow of 445 million RMB in 2025, up 31.2% year-over-year [2] - The company is expanding its technical capabilities, with a notable increase in project signings for antibody, small nucleic acid, ADC, and peptide drugs [3] - The overseas revenue reached 453 million RMB, accounting for 27.3% of total revenue, reflecting a year-over-year increase of 3.3% [4] - The company expects a recovery in domestic business in 2026, driven by improved market competitiveness and ongoing demand recovery [4] Summary by Sections Financial Performance - In 2025, the company reported a revenue of 1.658 billion RMB, a decrease of 17.87% from the previous year, while net profit attributable to shareholders was 298 million RMB, an increase of 302.08% [10] - The company forecasts net profits of 528 million RMB, 654 million RMB, and 848 million RMB for 2026, 2027, and 2028 respectively, with significant upward adjustments of 54% and 48% for 2026 and 2027 [5][11] Business Development - The company’s total order backlog was approximately 2.6 billion RMB, with new orders also around 2.6 billion RMB, indicating a year-over-year increase of 41.3% [1] - The company is enhancing its core business capabilities and expanding its facilities, which will support future business development [3] Market Outlook - The report anticipates continued growth in overseas revenue and a gradual recovery in domestic business, supported by the company’s strong market position in non-clinical safety evaluation [4] - The target prices for A and H shares are set at 45.83 RMB and 28.79 HKD respectively, based on a price-to-earnings ratio of 65x and 36x for 2026 [5]

Investment Rating - The report maintains a "Buy" rating for both A and H shares of the company [7] Core Views - The company achieved revenue and net profit of 1.658 billion and 298 million RMB in 2025, reflecting a year-over-year change of -17.9% and +302.1% respectively, aligning with performance forecasts [1] - The company has seen a significant increase in new orders, with 4Q25 new signed orders amounting to 960 million RMB, a year-over-year increase of 118.2%, indicating a recovery in domestic demand [1] - The overall order backlog for the company stands at approximately 2.6 billion RMB, up 18.2% year-over-year, with new signed orders also increasing by 41.3% year-over-year [1] Summary by Relevant Sections Financial Performance - The company's gross margin for 2025 was 20.7%, down 7.7 percentage points year-over-year, primarily due to the impact of low-quality orders from previous periods [2] - Operating cash flow for 2025 was 445 million RMB, reflecting a significant improvement of 31.2% year-over-year [2] Business Segments - Non-clinical research services generated revenue of 1.577 billion RMB, down 17.8% year-over-year, while overseas revenue in this segment grew by 3.1% [3] - Clinical services and others reported revenue of 72.83 million RMB, down 27.1% year-over-year, but the company is advancing its capabilities in biomarker detection for neurological diseases [3] - The experimental model supply segment saw a remarkable increase in revenue to 7.75 million RMB, up 754.5% year-over-year, indicating strong demand for diverse research needs [3] Geographic Revenue Breakdown - Overseas revenue reached 453 million RMB, up 3.3% year-over-year, accounting for 27.3% of total revenue, an increase of 5.6 percentage points year-over-year [4] - Domestic revenue was 1.204 billion RMB, down 23.8% year-over-year, primarily due to pressure from historical low-quality orders [4] Profit Forecast and Valuation - The company expects net profit attributable to shareholders to be 528 million, 654 million, and 848 million RMB for 2026, 2027, and 2028 respectively, with significant upward adjustments of 54% and 48% for 2026 and 2027 [5][11] - The report assigns a price-to-earnings ratio of 65x for A shares and 36x for H shares for 2026, with target prices set at 45.83 RMB and 28.79 HKD respectively [5]

Overview - The CRO industry in China has developed rapidly in recent years, particularly due to clear national pharmaceutical policies, accelerated medical reforms, and the expansion of the medical insurance market [1][9] - By 2024, the CRO market in China is expected to reach 89.22 billion yuan, with a year-on-year growth of 5.19%, and the clinical CRO market is projected to reach 46.31 billion yuan, growing by 4.68% [1][9] Industry Development - The CRO industry in China began in 1996 with the establishment of the first CRO company by MDS Pharmaceutical Services [5] - The industry has undergone significant changes, including a major reshuffle in 2015 due to quality concerns, leading to the elimination of many low-level CROs [5][10] - Major players like WuXi AppTec and Tigermed have gained competitive advantages through capital strength and project experience [5][10] Market Policies - The Chinese government has issued various policies to support the pharmaceutical manufacturing industry, encouraging new drug research and optimizing approval processes [6][7] Industry Chain - The CRO industry chain includes upstream components like experimental animals and biological reagents, midstream CRO companies, and downstream clients such as pharmaceutical companies and research institutions [8] - The pharmaceutical industry is the primary client for CROs, outsourcing clinical research to reduce costs and improve efficiency [8] Current Market Status - The global CRO market is projected to reach 90.03 billion USD in 2024, with a year-on-year growth of 9.65%, and the clinical CRO market is expected to reach 62.57 billion USD, growing by 8.35% [9] - The demand for high-quality medical resources is increasing, particularly in areas like rare diseases and public health events, driving the growth of the CRO market [9] Competitive Landscape - The CRO market in China is becoming increasingly competitive, with a notable shift towards Asia due to cost advantages and a large patient population [10] - Leading companies such as Tigermed and Kanglongda are recognized for their comprehensive clinical research services and have significant market shares [10][12] Future Trends - The quality management standards for drug development are expected to improve, leading to increased concentration in the industry as smaller CROs face challenges [13][14] - There will be a rise in specialized CROs focusing on specific disease areas, providing differentiated services to pharmaceutical companies [13][14]