Hepalink 1Q26 Earnings Beat Expectations Despite API Price Pressure; Sell Rating Maintained

Overview

Goldman Sachs released an update on Hepalink's 1Q26 results, noting that sales met expectations but declined year-over-year due to API price pressure, while earnings exceeded expectations driven by margin expansion, cost control, and one-off gains. The Sell rating is maintained, with the target price slightly raised to HKD 4.03, reflecting concerns over continued pressure on the API business and limited contributions from new ventures.

Core views

Regarding sales, 1Q26 revenue was RMB 1.3 billion (-4.7% YoY), in line with Goldman Sachs' expectations, primarily dragged down by heparin API price pressure. On the earnings front, net profit was RMB 188 million (+19.8% YoY), 13% above expectations, driven by: 1) Gross margin expansion to 33.8% (vs. 27% in 1Q25) due to the increasing proportion of high-margin finished dose business; 2) R&D and administrative expenses declining 9% and 6% YoY respectively, demonstrating cost discipline; 3) A one-off gain of RMB 114 million from fair value changes in financial assets (vs. a loss of RMB 45 million in 1Q25), offsetting foreign exchange losses. Regarding cash flow and capital structure, operating cash flow declined 31% YoY mainly due to reduced tax refunds, but the company added nearly RMB 1 billion in short-term borrowings, resulting in a net cash increase of RMB 422 million. Goldman Sachs continues to monitor the expansion progress of the CDMO and CSO businesses, believing their contribution to earnings remains in the early stages. Valuation and Forecast Adjustments: Based on 1Q results, Goldman Sachs raised its 2026/27/28 earnings forecasts by 8.7%/8.4%/7.9%, and slightly adjusted the target price from HKD 3.98 to HKD 4.03. Valuation uses a Sum-of-the-Parts (SOTP) approach: Finished Dose business valued at HKD 3.24 billion (5-year exit PE 10x, CAGR 10%), CDMO business at HKD 2.2 billion (5-year exit PE 5x, CAGR 5%), and API business at HKD 300 million (5-year exit PE 6.3x, referencing global generic pharmaceutical company valuations).

Analysis framework

Goldman Sachs employs a Sum-of-the-Parts (SOTP) valuation method, breaking down Hepalink's business into three segments: Finished Dose, CDMO, and API, assigning different valuation multiples to each. The Finished Dose business receives the highest valuation (10x PE) due to high growth and margins, while CDMO and API businesses receive lower multiples (5x and 6.3x PE) due to slower growth or commoditized attributes. This approach reflects the differing growth prospects and risks of each segment, helping investors understand the contribution of each板块 to the overall valuation.

Methodology notes

• Valuation MethodSOTP Sum-of-the-Parts Valuation

  Valuing different business segments of a company separately and summing them up

  Goldman Sachs breaks down Hepalink into Finished Dose, CDMO, and API businesses, assigning different PE multiples based on each segment's growth prospects and risks. This avoids obscuring business differences with a single valuation multiple and more accurately reflects the company's overall value.

• Valuation MethodPE/PEG valuation

  Adjusting P/E multiples based on expected earnings growth

  The Finished Dose business receives a 10x PE due to a 10% 5-year CAGR, while CDMO and API receive lower multiples due to slower growth (5% and comparable to generic pharma companies), reflecting the positive correlation between growth and valuation.

Key data

• 1Q26 SalesRMB 1.3 billion-4.7% YoY, in line with expectations
• 1Q26 Net ProfitRMB 188 million+19.8% YoY, 13% above expectations
• Gross Margin33.8%Up 6.8 percentage points from 27% in 1Q25
• Target PriceHKD 4.03Slightly adjusted from previous HKD 3.98
• 2026-2028 Earnings Forecast Adjustment+8.7%/+8.4%/+7.9%Reflects impact of 1Q results

Impact & implications

Goldman Sachs believes Hepalink's API business faces continued price pressure, while improvements in the Finished Dose and CDMO businesses remain limited in contribution. The maintained Sell rating reflects concerns over sluggish core business growth; the slight target price adjustment is solely due to short-term earnings upgrades and does not alter the long-term negative view. Investors should monitor API pricing, finished dose market share, and CDMO order progress.

Risks

• API prices and customer demand below expectations
• Finished dose business market share expansion below expectations
• Slow progress in securing CDMO orders
• Innovative drug pipeline delivery below expectations

What to watch

• API price trends and changes in customer orders
• Progress in finished dose business market share expansion
• Status of new CDMO order acquisitions
• Milestone progress in innovative drug R&D pipeline