Complex small-molecule and emerging-modality orders boost the CDMO backlog, but 1H26 group results remained below Morgan Stanley's expectations

Overview

The report reviews Apeloa Pharmaceutical's 2Q26 and 1H26 performance. Group revenue and earnings fell below Morgan Stanley's forecasts, but the report believes that the CDMO order backlog, project pipeline, high-value complex-molecule orders, and biosimilar initiatives improve medium-term growth visibility, leaving the original investment thesis unchanged.

Core views

In terms of results, Apeloa Pharmaceutical reported 1H26 revenue of Rmb4,823mn, down 11.4% year over year, and earnings of Rmb522mn, down 7.2% year over year, 7.7% and 9.2% below Morgan Stanley's forecasts, respectively. Based on these figures, the report derives 2Q26 revenue of Rmb2,37mn as stated in the original text, down 12.5% year over year, and earnings of Rmb273mn, down 13.1% year over year. AlphaSignals classified the results as a "modest beat" relative to market consensus, although there was still a clear shortfall relative to Morgan Stanley's own model. The report judges that the results leave the original investment thesis unchanged and expects consensus EPS to be revised modestly upward over the next 12 months. CDMO is central to the report's continued positive view. Revenue from the business reached Rmb810mn in 1H26, up 17.1% year over year. Management's guidance for 2026 CDMO revenue growth is 20% to 30%, implying that growth could accelerate further as order deliveries pick up in 2H26. The three-year CDMO backlog reached Rmb7.3bn in 1H26, up 22% half over half from Rmb6.0bn in 2025. The backlog-to-revenue ratio rose from 2.73 in 2025 to 3.08, indicating that coverage from new orders relative to current-period revenue improved further and providing visibility into future revenue conversion. The number and mix of projects are also improving. The project pipeline grew 37% year over year to 1,620 projects in 1H26, including 417 commercialized or late-stage Phase III projects, as well as 52 ADC projects and 71 peptide projects. Growth came from both overseas and Chinese markets, with demand from local Chinese biotech clients growing significantly faster. New project inflows increasingly involve complex molecules and emerging modalities such as cyclic peptides, molecular glues, and PROTACs. The average selling prices of these projects can be as high as 10 times those of traditional small molecules, so the upgraded project mix could not only expand order volumes but also increase value per project. The company entered the biosimilar CDMO business in 2026. The report notes that streamlined clinical pathways in the US and Europe could shorten the biosimilar development cycle from 8-9 years to 3-4 years and reduce development costs from US$1-2bn to US$30mn-50mn. Apeloa plans to develop 15 biosimilar projects, five of which have already entered the development stage, seeking to capture outsourcing opportunities arising from shorter development cycles and lower costs. Against a backdrop of strong order inflows and high capacity utilization, the company is accelerating capital expenditure and plans to increase peptide SPPS capacity from 20kL to 30kL in the near term. The company has also introduced a new stock option plan for its CDMO business, with exercise conditions requiring the business to achieve an earnings CAGR of no less than 11% from 2025 to 2029, thereby linking the incentive arrangement to medium-term earnings growth. Morgan Stanley's model shows revenue of Rmb9,783.6mn, Rmb10,512.2mn, Rmb11,550.5mn, and Rmb12,622.4mn for 2025A, 2026E, 2027E, and 2028E, respectively; ModelWare net income of Rmb890.7mn, Rmb1,328.0mn, Rmb1,421.9mn, and Rmb1,710.5mn; and EPS of Rmb0.77, Rmb1.15, Rmb1.23, and Rmb1.48. Consensus EPS for the same periods is Rmb0.88, Rmb0.92, Rmb1.08, and Rmb1.29, respectively, with Morgan Stanley's forecasts for 2026 through 2028 above consensus. The corresponding P/E multiples are 21.1x, 18.0x, 16.8x, and 14.0x; P/B multiples are 3.0x, 3.3x, 2.9x, and 2.5x; and EV/EBITDA multiples are 11.3x, 10.5x, 9.1x, and 10.0x. The target price is based on a discounted cash flow methodology, assuming an 8.8% cost of equity, a 4% perpetual growth rate, a 15% long-term ROE on new investments, and a 30% net debt-to-equity ratio. The target-price history shows an increase from Rmb18.00 on January 2, 2026 to Rmb19.80 on March 20, Rmb20.20 on April 22, and Rmb23.20 on August 21. Based on the closing price of Rmb20.72 that day, the upside is 12%. The report assigns the stock an Overweight rating and an Attractive view on China's healthcare industry. Upside risks listed in the report include securing new API manufacturing contracts from multinational companies, increases in prices for antibiotic, central nervous system, cardiovascular, and veterinary APIs, the formulations business winning tenders in China, and improved market sentiment toward CDMO exposure. Downside risks include price cuts in China's generic-drug formulation tenders, further roll-off of COVID-related orders and R&D contracts, and slowing demand for R&D outsourcing to Chinese service providers.

Analysis framework

The report first compares actual 1H26 revenue and earnings with Morgan Stanley's model and market consensus, and derives 2Q26 performance accordingly. It then assesses future delivery visibility based on CDMO revenue growth, the order backlog, the backlog-to-revenue ratio, project stages, and project mix, before evaluating growth drivers in conjunction with average selling prices for complex molecules, biosimilar development cycles and costs, capacity utilization, and capital expenditure. Finally, the report incorporates these assessments into Morgan Stanley ModelWare earnings forecasts and derives a target price using a discounted cash flow methodology, while listing scenarios that could cause results to exceed or fall below expectations.

Methodology notes

• Valuation MethodologyDCF Discounted Cash Flow

  Discounted cash flow target price

  The report discounts expected future cash flows to present value and applies an 8.8% cost of equity, a 4% perpetual growth rate, a 15% long-term ROE on new investments, and a 30% net debt-to-equity ratio to derive a target price of Rmb23.20.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analysis of order backlog, backlog-to-revenue ratio, and capacity utilization

  The report uses the order backlog and backlog-to-revenue ratio to measure future demand coverage, project inflows and project stages to assess demand sustainability, and high capacity utilization and expansion plans to evaluate supply capacity and capital expenditure requirements.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Apeloa Pharmaceutical Co Ltd (000739.SZ, 000739 CH)

  The report believes the company will benefit from growth in the CDMO order backlog, inflows of complex-molecule projects, expansion of the biosimilar business, and accelerated deliveries in 2H26.

  Strengths

  The three-year CDMO order backlog reached Rmb7.3bn, while the backlog-to-revenue ratio rose to 3.08. The project pipeline reached 1,620 projects, with complex-molecule and emerging-modality projects carrying higher average selling prices.

  Weaknesses

  1H26 group revenue and earnings declined 11.4% and 7.2% year over year, respectively, and were 7.7% and 9.2% below Morgan Stanley's forecasts; capacity expansion also requires accelerated capital expenditure.

  Comparison

  The average selling price of complex-molecule and emerging-modality projects can be as high as 10 times that of traditional small molecules.

  Risks

  Price cuts in China's generic-drug formulation tenders, further roll-off of COVID-related orders and R&D contracts, and slowing demand for R&D outsourcing to Chinese service providers.

Key data

• 1H26 RevenueRmb4,823mnDown 11.4% year over year and 7.7% below Morgan Stanley's forecast
• 1H26 EarningsRmb522mnDown 7.2% year over year and 9.2% below Morgan Stanley's forecast
• 2Q26 RevenueRmb2,37mnPresented as such in the original report, down 12.5% year over year
• 2Q26 EarningsRmb273mnDown 13.1% year over year
• 1H26 CDMO RevenueRmb810mnUp 17.1% year over year, with growth expected to accelerate in 2H26 as deliveries pick up
• 2026 CDMO Revenue Guidance20%-30% growthManagement guidance, alongside plans to accelerate capital expenditure
• Three-Year CDMO Order BacklogRmb7.3bnUp 22% half over half in 1H26, versus Rmb6.0bn in 2025
• Backlog-to-Revenue Ratio3.081H26 level, versus 2.73 in 2025
• Project Pipeline1,620 projectsUp 37% year over year, including 417 commercialized or Phase III projects, 52 ADC projects, and 71 peptide projects
• Average Selling Price of Complex-Molecule ProjectsUp to 10 times that of traditional small moleculesInvolving emerging modalities such as cyclic peptides, molecular glues, and PROTACs
• Biosimilar Plan15 projectsFive of which have entered the development stage
• Biosimilar Development CycleShortened from 8-9 years to 3-4 yearsPotential impact of streamlined clinical pathways in the US and Europe as described in the report
• Biosimilar Development CostReduced from US$1-2bn to US$30mn-50mnPotential impact of streamlined clinical pathways as described in the report
• Peptide SPPS Capacity TargetIncrease from 20kL to 30kLNear-term capacity expansion target
• CDMO Equity Incentive Exercise Condition2025-2029 earnings CAGR of no less than 11%New stock option plan for the CDMO business
• 2026E／2027E／2028E EPSRmb1.15／Rmb1.23／Rmb1.48Consensus estimates for the same periods are Rmb0.92／Rmb1.08／Rmb1.29
• 2026E／2027E／2028E P/E18.0x／16.8x／14.0xBased on the report's model and pricing as of August 21, 2026
• Target PriceRmb23.2012% upside from the closing price of Rmb20.72; the previous target price on April 22, 2026 was Rmb20.20

Impact & implications

The report believes the short-term decline in group revenue and earnings does not alter the medium-term CDMO thesis: the order backlog, backlog-to-revenue ratio, and number of late-stage projects improve future delivery visibility, while complex molecules and emerging modalities could enhance the business mix through higher prices per project. The biosimilar initiative and peptide capacity expansion add new growth pathways, but also require the company to accelerate capital investment and deliver on its order, capacity, and earnings targets.

Risks

• Upside risk: The company secures new API manufacturing contracts from multinational companies.
• Upside risk: Prices increase for antibiotic, central nervous system, cardiovascular, and veterinary APIs.
• Upside risk: The formulations business wins tenders in China.
• Upside risk: Market sentiment toward CDMO business exposure improves.
• Downside risk: Prices are reduced in China's generic-drug formulation tenders.
• Downside risk: COVID-related orders and R&D contracts roll off further.
• Downside risk: Demand for R&D outsourcing to Chinese service providers slows.

What to watch

• Watch whether accelerated order deliveries in 2H26 can drive a further pickup in CDMO revenue growth.
• Watch whether management delivers on its guidance for 20%-30% CDMO revenue growth in 2026.
• Watch changes in the three-year order backlog, backlog-to-revenue ratio, and inflows of complex-molecule projects.
• Watch whether peptide SPPS capacity can increase from 20kL to 30kL as planned, as well as the corresponding progress of capital expenditure.
• Watch the progress of the 15 biosimilar projects, five of which are already in the development stage.
• Watch whether the CDMO business can meet the equity incentive exercise condition of achieving an earnings CAGR of no less than 11% from 2025 to 2029.