Pharmaron's Second-Quarter Growth Accelerates, Full-Year Revenue Guidance Raised, Target Price Increased to HK$36.8

Overview

The report reviews Pharmaron's 2Q26 and 1H26 results, noting steady Laboratory Services, significant acceleration in CDMO, and a continued recovery in the clinical business, with orders and the project pipeline supporting management's upgrade to full-year revenue guidance. Although Deutsche Bank lowered its gross margin forecasts due to exchange rates and the CDMO ramp-up, it raised its revenue and net profit forecasts and target price while reiterating its Buy rating.

Core views

Overall earnings growth accelerated further in 2Q26. Pharmaron's quarterly revenue reached RMB4.017 billion, up 20.2% YoY and 12.3% QoQ; non-IFRS adjusted net profit was RMB503 million, up 23.8% both YoY and QoQ. 1H26 revenue was RMB7.595 billion, up 17.9% YoY. However, RMB appreciation against the USD pressured gross margin, with the 1H26 gross margin declining 1.1 percentage points YoY to 32.6%. Selling and R&D expense ratios remained stable at 2.2% and 3.9%, respectively, while the administrative expense ratio declined 0.1 percentage points to 13.1%. Nevertheless, the operating margin still declined 1.1 percentage points to 13.9%, and the core net margin fell 0.6 percentage points to 10.8%. Laboratory Services continued to deliver steady growth, although exchange rates weighed on margins. 2Q26 Laboratory Services revenue was RMB2.430 billion, up 13.9% YoY and 10.2% QoQ, with Bioscience Services contributing more than 60% of segment revenue. Management stated that growth was particularly strong in emerging technology areas within Bioscience Services, increasing more than 25% YoY; AIDD revenue accounted for approximately 7%-8% of Laboratory Services revenue. The segment's 2Q26 gross margin was 39.8%, down 2.2 percentage points YoY and 1.9 percentage points QoQ, mainly due to adverse exchange-rate effects. Management expects the gross margin to remain stable in 2H26. CDMO was the strongest growth engine during the period. 2Q26 CDMO revenue reached RMB1.012 billion, up 42.0% YoY and 15.9% QoQ, with more than 85% of revenue generated from existing Laboratory Services clients, demonstrating client conversion from front-end R&D services to back-end manufacturing services. Multiple projects continued to advance into later stages, with more deliveries expected to be concentrated in the second half. The company also signed a commercial manufacturing agreement for an oral GLP-1 product with a multinational company. Management believes demand is strong and expects growth momentum to continue through 2H26 and 2027. To ensure project delivery, the company plans to accelerate the expansion of small-molecule CDMO capacity in Shaoxing and Hangzhou, although the CDMO business ramp-up also prompted Deutsche Bank to lower its medium-term gross margin forecasts. The Clinical Development business continued to recover. 2Q26 revenue was RMB568 million, up 15.5% YoY and 13.7% QoQ. Management noted that demand in the Chinese market continues to recover as the financing environment improves. After stabilizing last year, SMO and CRO pricing is expected to recover modestly this year. The company expects full-year segment revenue to increase 10%-15% YoY, with gross margin improving quarter by quarter. Orders provide visibility into subsequent growth. The company's new purchase orders increased more than 30% YoY in 1H26. By business, new orders for Laboratory Services, CDMO, and Clinical Services increased more than 20%, 50%, and 30% YoY, respectively. Supported by strong demand, continued project pipeline advancement, and improving growth momentum, management raised its 2026 revenue growth target from the previous 12%-18% to 15%-20%. This target already incorporates exchange-rate effects; at constant exchange rates, the target growth rate is 18%-23%. Accordingly, Deutsche Bank raised its FY26E and FY27E revenue forecasts by 3% and 6%, respectively. Meanwhile, factoring in the CDMO Services ramp-up, it lowered its gross margin forecasts for the two years by 1.2 and 1.4 percentage points to 34.4% and 35.5%, respectively. After incorporating the revenue growth and margin adjustments, FY26E and FY27E net profit forecasts were still raised by 3% and 4%, respectively. Revenue is now expected to grow 18.0% and 17.5% in the two years, respectively, while net profit is expected to grow 22.0% and 30.0%, respectively. Regarding valuation, Deutsche Bank uses a five-year DCF, rolling the forecast period from 2026-2030 to mid-2026-2030 and applying an 8.3% weighted average cost of capital and a 2.5% terminal growth rate. Driven by the earnings forecast upgrades and the valuation-period roll-forward, the 12-month target price was increased to HK$36.8. The company currently trades at 26x and 20x FY26E/FY27E P/E, while the target price implies 29x and 22x. The report therefore reiterates its Buy rating.

Analysis framework

The report first analyzes changes in revenue, profit, and expense ratios in 2Q26 and 1H26, then separately examines the growth, gross margins, clients, and project progress of Laboratory Services, CDMO, and Clinical Development. It subsequently assesses visibility into future growth based on new orders and management guidance, revises its revenue, gross margin, and net profit forecasts accordingly, and finally determines the target price through a five-year DCF, with forward P/E used as a valuation cross-check.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  Five-Year DCF Valuation

  The report discounts forecast-period future cash flows and terminal value to present value, applying an 8.3% weighted average cost of capital and a 2.5% terminal growth rate. Combined with earnings forecast adjustments and the valuation-period roll-forward, it raises the target price to HK$36.8.

• Valuation MethodPE/PEG valuation

  Forward P/E Cross-Check

  The report assesses the DCF result using FY26E/FY27E P/E ratios: the current price implies 26x and 20x, while the target price implies 29x and 22x.

Asset mapping & comparison

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

• Pharmaron (3759.HK)

  The report believes the company benefits from steady demand for Laboratory Services, accelerating CDMO deliveries, recovery in the clinical business, and growth in new orders.

  Strengths

  Its businesses span Laboratory Services, CDMO, and Clinical Development; more than 85% of CDMO revenue comes from existing Laboratory Services clients; new orders increased more than 30% YoY in 1H26.

  Weaknesses

  RMB appreciation weighed on gross margin, while the CDMO business ramp-up also led to cuts in FY26E/FY27E gross margin forecasts.

  Comparison

  The report provides no direct comparison with specific peers; the current price implies FY26E/FY27E P/E ratios of 26x and 20x, while the target price implies 29x and 22x.

  Risks

  Geopolitical tensions, intensifying market competition, rising operating costs, and government drug price control policies.

Key data

• 2Q26 RevenueRMB4,017 millionUp 20.2% YoY and 12.3% QoQ.
• 2Q26 Non-IFRS Adjusted Net ProfitRMB503 millionUp 23.8% both YoY and QoQ.
• 1H26 RevenueRMB7,595 millionUp 17.9% YoY.
• 1H26 Gross Margin32.6%Down 1.1 percentage points YoY, mainly due to RMB appreciation against the USD.
• 1H26 Operating Margin and Core Net Margin13.9% / 10.8%Down 1.1 and 0.6 percentage points YoY, respectively.
• 2Q26 Laboratory Services RevenueRMB2,430 millionUp 13.9% YoY and 10.2% QoQ.
• Laboratory Services Business MixBioscience Services accounted for more than 60%; AIDD accounted for 7%-8%Revenue from emerging technology areas increased more than 25% YoY.
• 2Q26 Laboratory Services Gross Margin39.8%Down 2.2 percentage points YoY and 1.9 percentage points QoQ.
• 2Q26 CDMO RevenueRMB1,012 millionUp 42.0% YoY and 15.9% QoQ; more than 85% of revenue came from existing Laboratory Services clients.
• 2Q26 Clinical Development RevenueRMB568 millionUp 15.5% YoY and 13.7% QoQ.
• 1H26 New Purchase OrdersUp more than 30% YoYOrders for Laboratory Services, CDMO, and Clinical Services increased more than 20%, 50%, and 30%, respectively.
• 2026 Revenue Growth Target15%-20%Previous guidance was 12%-18%; 18%-23% at constant exchange rates.
• FY26E/FY27E Revenue and Net Profit Growth ForecastsRevenue 18.0%/17.5%; net profit 22.0%/30.0%Revenue forecasts were raised by 3% and 6%, respectively, while net profit forecasts were raised by 3% and 4%, respectively.
• FY26E/FY27E Gross Margin Forecasts34.4% / 35.5%Lowered by 1.2 and 1.4 percentage points, respectively, due to the CDMO ramp-up.
• DCF and Target PriceWACC 8.3%; terminal growth rate 2.5%; target price HK$36.8Five-year DCF valuation; the target price implies FY26E/FY27E P/E ratios of 29x and 22x.

Impact & implications

The report believes that steady demand for Laboratory Services, CDMO projects advancing into later stages, the recovery of the clinical business, and strong new orders collectively enhance visibility into future revenue growth and support the company's upgraded 2026 guidance. Despite exchange-rate pressure and the CDMO ramp-up reducing gross margin expectations, faster revenue growth remains sufficient to drive upgrades to FY26E and FY27E net profit forecasts.

Risks

• Geopolitical tensions may adversely change the company's operating environment.
• Intensifying market competition may affect business growth and profitability.
• Rising operating costs may further squeeze margins.
• Government-led drug price control policies may adversely affect the business.

What to watch

• Monitor the delivery progress of CDMO projects in 2H26 and whether growth momentum can continue into 2027.
• Monitor the expansion of small-molecule CDMO capacity in Shaoxing and Hangzhou and the progress of project ramp-ups.
• Monitor whether the Laboratory Services gross margin can remain stable in 2H26.
• Monitor the modest recovery in SMO and CRO pricing and the quarter-by-quarter improvement in the Clinical Development gross margin.
• Monitor the continued impact of the RMB/USD exchange rate on revenue and gross margin.
• Monitor whether 2026 revenue growth can reach the upgraded target of 15%-20%.