Jiuyuan Gene IPO analysis and subscription plan

Hangzhou Jiuyuan Gene Engineering Co., Ltd. (hereinafter referred to as the "Company") was established in 1993 and is headquartered in Zhejiang Province. It is a Chinese company specializing in the biopharmaceutical field. With years of experience in R&D, production, and commercialization, the Company's main products cover orthopedics, oncology, and hematology treatments. The Company plans to raise funds through this global offering for product development, market expansion, and corporate operations.

1. Overview of the Issuer

Company Profile: Hangzhou Jiuyuan Gene Engineering Co., Ltd., established in 1993 and headquartered in Hangzhou, Zhejiang Province, is a company focused on the biopharmaceutical field.

Background: The Company was initiated by Hangzhou Huadong Medicine Group Holding Co., Ltd. (Sino-American Huadong) and is dedicated to the R&D, production, and sales of biopharmaceuticals and medical devices.

Major Shareholders: As of the latest practicable date, Huadong Medicine holds approximately 21.06% of the Company's shares through its wholly-owned subsidiary Sino-American Huadong, making it the single largest shareholder.

2. Basic Information of the Offering

Number of Shares Offered: The global offering consists of 45,398,800 H shares.

Par Value: The par value per share is RMB 1.00.

Offering Price: The offering price per share ranges from HKD 11.48 to HKD 12.56.

Offering Date: The expected pricing date is on or before November 26, 2024.

Proposed Listing Exchange and Board: Main Board of The Stock Exchange of Hong Kong.

Total Share Capital Post-Offering: Upon completion of the global offering, the Company is expected to have 245,398,800 issued shares.

3. Core Business

Core Business: The Company is primarily engaged in the R&D, production, and sales of biopharmaceuticals and medical devices, focusing on orthopedics, oncology, and hematology treatments. It has multiple marketed products and pipeline projects, including products such as BoneGuide, Yinogia, and Jilifen.

Business Model: The Company sells its products through its own sales team and third-party distributors, covering a nationwide sales and distribution network. It also provides pharmaceutical services to further diversify revenue sources.

4. Industry and Market Position

Market Position: The Company holds a leading position in orthopedics, oncology, and hematology treatments, with several products occupying significant market shares. It is China's first producer of BoneGuide, a bone repair material containing rhBMP-2.

Competitive Advantages: The Company possesses strong R&D capabilities, a rich product pipeline, extensive market coverage, and a professional sales team, giving it strong market competitiveness.

5. Corporate Governance and Independence

Corporate Governance: The Company has a well-structured board of directors, supervisory board, and senior management team, with sound governance mechanisms to ensure scientific and independent decision-making.

Independence: The Company maintains independence from its controlling shareholders and actual controllers, avoiding 同业竞争 and related-party transactions.

6. Use of Proceeds

Use of Proceeds: The proceeds will primarily be used for the continuous R&D of strategic pipeline products, marketing and commercialization of existing and near-commercial products, strategic collaborations, manufacturing system upgrades, and working capital.

7. Risk Factors

Market Competition: The Company faces pressure from domestic and international competitors and must continuously enhance product competitiveness.

Policy Risks: Drug pricing policies and volume-based procurement policies may impact the Company's performance.

R&D Risks: Failure or delays in new drug development could adversely affect the Company's growth.

Market Risks: Changes in market demand and fluctuations in raw material prices may impact the Company's operating performance.

Offering Information and Lottery Odds:

The Company is offering 45.3988 million shares globally, with 200 shares per lot. As of the time of writing, the oversubscription rate is 31.19x, likely triggering a clawback to 40%. There are 45,398.8 lots each for Group A and Group B, with an estimated 5K-9K participants. The lottery odds for one lot are approximately 100%.

Pre-IPO Investors and Cornerstone Investors:

Several pre-IPO investors participated in the Company's funding rounds. The last pre-IPO investor, Wanliyang, completed its investment in August 2023 at a cost of RMB 40.67 million, with a per-share cost of HKD 4.48, representing a 62.7% discount to the offering price and a 12-month lock-up period.

The Company has introduced seven cornerstone investors, subscribing to HKD 352 million. At the lower price, cornerstone investors account for 67.15%; at the mid-point, 64.14%; and at the upper price, 61.38%. The cornerstone lock-up period is six months.
 

Sponsor:

Huatai Financial is the sole sponsor and stabilizing agent for this offering. Huatai Financial has sponsored three projects in 2024, all of which broke issue price. As a stabilizing agent, Huatai Financial is comparable to CICC, forming a duo of stabilizing agents in the industry.

Financial Overview:

Revenue:RMB 1.307 billion in 2021, RMB 1.125 billion in 2022,RMB 1.287 billion in 2023, and RMB 1.326 billion in the last 12 months as of June 30, 2024.

Gross Profit:RMB 950 million in 2021, RMB 854 million in 2022, RMB 991 million in 2023, and RMB 1.001 billion in the last 12 months as of June 30, 2024.

Net Profit:RMB 119 million in 2021, RMB 59.867 million in 2022, RMB 119 million in 2023, and RMB 128 million in the last 12 months as of June 30, 2024.

Comprehensive Review:

Jiuyuan Gene derives approximately 94% of its revenue from product sales. By therapeutic area, orthopedics contributed RMB 708 million (55.1%) in 2023, oncology RMB 248 million (19.3%), hematology RMB 220 million (17.2%), and others RMB 40 million (3.1%). The Company's products are primarily sold in mainland China, accounting for 96% of sales.

In the orthopedics sector, Jiuyuan Gene ranks first among bone repair material manufacturers, with its flagship product BoneGuide holding a 21.8% market share. The second and third places are held by Shanxi Aoruisi Biology and Beijing Likang Technology, both unlisted companies. The fourth is Sci-tech Innovation Board-listed Aoxin Medical, whose flagship product Gukin generated RMB 151 million in 2023, accounting for 66.47% of total revenue. Jiuyuan Gene's BoneGuide revenue was RMB 708 million in 2023, representing 55.1% of total revenue. Comparing the core product revenues of the two companies, Jiuyuan Gene's market cap is inevitably higher than Aoxin Medical's.

Currently, Aoxin Medical has a total market cap of RMB 2.355 billion (~HKD 2.531 billion). Its 2023 revenue was RMB 226 million, with a net profit of RMB 54 million. In contrast, Jiuyuan Gene's 2023 revenue was RMB 1.287 billion, with a net profit of RMB 119 million. The offering implies a market cap of HKD 2.817-3.082 billion, making Jiuyuan Gene appear undervalued. However, impacted by centralized procurement, Jiuyuan Gene is not doing well, as evidenced by its net margin of only 9.3%.

As of the latest practicable date, China has four commercialized rhBMP-2 bone repair materials, including BoneGuide. Compared to Zhenghai Biology, Jiuyuan Gene has an advantage in revenue but lags in gross and net margins. Despite higher revenue, its net profit is lower than Zhenghai Biology's. Zhenghai Biology has a market cap of RMB 4.05 billion, with 2023 revenue of RMB 414 million and net profit of RMB 191 million (static P/E 21.21x, TTM P/E 24.15x). Jiuyuan Gene's static P/E is 22.04-24.12x, and TTM P/E is 20.48-22.40x, which is reasonable.

The Company's key pipeline drug, JY29-2 (Jiyoutai), was approved on November 2, 2023. It is a biosimilar of semaglutide, showing significant market potential in weight loss and diabetes treatment. However, due to patent restrictions on the original semaglutide GLP-1 compound, the launch of JY29-2 may be delayed.

The Company's oncology product, JY47, is one of four SIRPa-targeted drugs in China that have received IND approval.

Overall, Jiuyuan Gene's fundamentals are reasonable compared to peers. The offering aims to raise HKD 521-570 million, with cornerstone subscriptions of HKD 352 million, implying a free float of HKD 169-218 million. Sentiment-wise, Huatai Financial's role as sponsor and stabilizing agent is a negative. If it were CITIC or CCB, the subscription would likely be oversubscribed. Fundamentally, it's worth considering; financially, it's fair; sentiment-wise, the sponsor is a drawback. The healthcare sector is performing well, and the shareholders and cornerstone investors are decent. The weight-loss drug concept would attract flexible capital in the A-share market. Overall, it's neutral to slightly positive.

Subscription Plan:

I will subscribe

$JIUYUAN GENE(02566.HK) 

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