Haitong International: Maintains "Outperform" rating on CMS (00867) with a target price of HKD 18.38.

HAITONG INT'L released a research report stating that it has slightly adjusted CMS (00867) revenue forecast for 2025-26E to 8.33/9.30 billion yuan, a year-on-year increase of +11.5% / +11.6%; considering the company's research and development investment in innovative transformation, and investment in promoting innovative drug market, the bank slightly adjusted 2025-26E net profit attributable to shareholders to 1.67/1.88 billion yuan, a year-on-year increase of +3.4% / +12.9%. Considering that the company may spin off Demi Pharmaceuticals and list it at the end of the year, the bank revised the valuation model to cash flow discount (DCF) model and cash flow from FY26-FY35 to better reflect the long-term value of Demi Pharmaceuticals' pipeline cash flow. Based on WACC 7.9% and perpetual growth rate of 2.0%, the target price is 18.38 Hong Kong dollars (+85%, originally based on 2025 14xPER), and the "outperform the market" rating is maintained. The main points of HAITONG INT'L are as follows: Events In the first half of the year, CMS achieved revenue of 4 billion yuan (an increase of 11% year-on-year), with the main exclusive/branded products and innovative products generating revenue of 2.9 billion yuan (an increase of 21% year-on-year, according to pharmaceutical sales revenue calculation), which is the core engine for the company's performance growth. Gross profit margin is 72%, research and development expenditure is 570 million yuan (a decrease of 8% year-on-year), research and development expenses are 200 million yuan, and the research and development expense ratio is 5.1% (a decrease of 2.1pcts year-on-year); sales expenses are 1.4 billion yuan (an increase of 2% year-on-year). Net profit attributable to shareholders is 940 million yuan (an increase of 3% year-on-year). The performance is in line with the bank's expectations. Main business resumes growth, benefiting from continued growth in sales of exclusive/branded and innovative products During the first half of 2025, CMS revenue rebounded, partly due to the clearance of inventory procurement products and benefiting from the steady growth of core varieties such as Vifor (iron-based, non-calcium phosphate combination saccharose hydroxide iron chewable tablets), Metatong (methotrexate), Yiluqu (teriparatide monoclonal antibody IL23), Veetu (diazepam nasal spray), and Lefilan (methylene blue enteric-coated sustained-release tablets). The sales of main exclusive/branded and innovative products accounted for 62.1% of total sales (according to pharmaceutical sales revenue calculation), compared to 56.1% in 1H24. By segment (total revenue of 4.67 billion yuan, according to pharmaceutical sales revenue calculation): cardiovascular and cerebrovascular segment revenue is 2.2 billion yuan, an increase of +0.6% year-on-year; digestive/immune segment revenue is 1.4 billion yuan, an increase of 4.9% year-on-year; dermatological health segment revenue is 500 million yuan, an increase of 104% year-on-year; ophthalmic disease segment revenue is 360 million yuan, an increase of 18% year-on-year; other products revenue is 190 million yuan, a decrease of 2.3% year-on-year. Continuous landing of innovative achievements In the first half of the year, the company had 3 NDAs under review, including desitonecymbalta tablets, lucidotide cream (Demag Medical), and ZUNVEYL. In addition, there are about 10 Chinese clinical trials steadily progressing, including injection Y-3 for ischemic stroke treatment III clinical trial; lucidotide for specific eczema III clinical trial; MG-K10 (long-acting IL-4R) for asthma (III clinical trial), allergic rhinitis (II clinical trial), and other indications; ABP-671 (URAT1 inhibitor) for gout and hyperuricemia II/III clinical trials, etc. Other potential varieties include Povorcitinib (JAK1 inhibitor), CMS-D001 (highly selective TYK2 inhibitor), etc. Demag Medical spin-off listing expected to be completed within the year In April 2025, CMS plans to spin off Demag Medical for independent listing on the Hong Kong Stock Exchange. The spin-off is planned to be carried out through physical distribution, with CMS shareholders directly holding shares of Demag Medical. Demag Medical's research pipeline covers important skin diseases such as psoriasis, vitiligo, atopic dermatitis, and pyoderma. Currently, Demag Medical has over 650 professional sales personnel covering over 10,000 hospitals. The bank suggests continuing to pay attention to the progress of Demag Medical's listing.