Pharmaron: Strong CDMO Growth and Capacity Expansion Support Medium-Term Margin Improvement, While AIDD Expands the Project Funnel

Overview

This report summarizes the key takeaways from Pharmaron’s earnings call and non-deal roadshow. The core view is that 1H26 growth was jointly driven by CDMO, Laboratory Services, and Clinical Development, while order inflows, late-stage project conversion, and new capacity are expected to support medium-term revenue growth and CDMO margin improvement. AIDD is viewed as an incremental source of projects for the traditional business rather than a substitute.

Core views

Pharmaron achieved YoY growth of 17.9% in revenue, 7.0% in net profit, and 20.3% in adjusted net profit in 1H26. By business, revenue from Laboratory Services, CDMO, and Clinical Development increased 13.7%, 32.8%, and 13.8% YoY, respectively, with CDMO being the fastest-growing major segment. Based on first-half performance, management raised its full-year 2026 revenue growth guidance to 15%—20%, or 18%—23% at constant exchange rates. Laboratory Services is expected to grow 10%—15%, CDMO by more than 30%, and Clinical Development by 10%—15%. Accordingly, the report concludes that business growth is not being driven by a single segment, although CDMO remains the most important source of incremental growth. The company set its 2026 capital expenditure budget at approximately Rmb3.6bn, up from approximately Rmb2.6bn in 2025, and plans to add small-molecule CDMO capacity in Shaoxing and Hangzhou. The key issue for investors is whether the accelerated capacity rollout can keep pace with growth in commercial contracts, thereby avoiding a mismatch between capacity ramp-up and order realization. The report assesses capacity expansion in conjunction with orders, utilization, and project stages: if commercial projects are launched on schedule, the expansion could reinforce the company’s position as a major supplier; if project confirmation or volume ramp-up is delayed, elevated capital expenditure and losses at overseas sites could weigh on returns. The CDMO project funnel provides the primary basis for this capacity-expansion rationale. As of mid-2026, the company had 45 PPQ and commercial validation projects covering APIs, intermediates, and drug products. Most projects remained at the PPQ stage, with more late-stage projects expected to convert from 2H26 onward. Management stated that some projects target large indications and unmet medical needs, prompting clients to secure scalable and stable supply capacity ahead of commercialization. New purchase orders increased 50% YoY in 1H26, while high capacity utilization and an increase in continuing projects led the company to accelerate investment in commercial manufacturing. As projects transition from validation to commercial supply, order sizes expand, and capacity utilization improves, management expects the CDMO gross margin to rise to 30%—35% over the next 2—3 years. AIDD demand represents another growth avenue. Orders from AIDD biotechnology companies are increasing and currently account for 7%—8% of Laboratory Services revenue. These platforms can generate candidate molecules at scale around known targets, but insufficient high-quality experimental data still limits their ability to predict drug-like properties. Management therefore believes the risk of AIDD disrupting the traditional CRDMO model is low. Instead, advances in computational drug discovery could expand the early-stage project funnel, enabling more candidate molecules to enter experimental validation and development and thereby increasing demand for Pharmaron’s services. The model tables forecast net revenue of Rmb16,950mn, Rmb20,118mn, and Rmb24,067mn for 2026—2028, respectively; EBITDA of Rmb3,963mn, Rmb6,440mn, and Rmb8,100mn; and ModelWare net profit of Rmb2,081mn, Rmb2,962mn, and Rmb4,448mn. EPS based on the report table’s consensus methodology is Rmb1.17, Rmb1.67, and Rmb2.51, while Refinitiv consensus EPS is Rmb1.11, Rmb1.40, and Rmb1.81. Over the same period, P/E declines from 24.2x to 17.0x and 11.3x, EV/EBITDA declines from 14.7x to 8.7x and 6.4x, and ROE rises from 13.8% to 17.1% and 21.9%, reflecting the model’s assumption that revenue growth, margin expansion, and improved capital returns will jointly drive earnings growth. The valuation uses a discounted cash flow method, with a WACC of 10.5%, a perpetual growth rate of 3.0%, an RMB/HKD exchange rate of 1.1, and an approximately 28% A-H premium assumption. The report assigns an “Overweight” rating and a HK$35.60 target price to 3759.HK, implying 7% upside to the target price. It rates 300759.SZ “Equal-weight,” with a target price of Rmb41.3 as of the report date. Although the stances on the two share classes differ, the positive company-level thesis for both rests on CDMO project conversion, sustained order inflows, effective absorption of capacity, and margin improvement.

Analysis framework

The report first reviews overall and segment-level growth in 1H26 and then assesses the sustainability of growth using management’s raised full-year guidance. It subsequently connects capital expenditure with the number of PPQ projects, new orders, utilization, and late-stage project conversion to evaluate whether CDMO capacity expansion can translate into commercial revenue and higher gross margins. For AIDD, the report assesses its impact on the traditional CRDMO business based on molecule-generation capabilities, experimental data constraints, and the drug-candidate development process. Finally, through ModelWare forecasts and DCF valuation, it maps operating assumptions to earnings, valuation multiples, A/H-share target prices, and ratings.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  Discounted cash flow valuation

  The report estimates the company’s value using the present value of future cash flows. The base case assumes a WACC of 10.5% and a perpetual growth rate of 3.0%, which are used to derive the target price.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Matching order demand with commercial manufacturing capacity

  The report compares new orders, commercial demand from projects, and capacity utilization with the Shaoxing and Hangzhou expansion plans to determine whether new capacity can be effectively absorbed through contracts and project conversion.

• Industry/Sector Analysis Framework

  PPQ project funnel and stage-conversion analysis

  The report tracks project progress through stages including PPQ, commercial validation, and commercial supply, and uses the 45 projects and potential conversion after 2H26 to assess future order sizes and the margin trajectory.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare forecasting framework

  The report states that key financial metrics are based on the ModelWare framework and uses it to present revenue, EBITDA, net profit, returns, and valuation multiples for 2026—2028.

• Valuation Method

  A-H premium and exchange-rate mapping

  The report uses an RMB/HKD exchange rate of 1.1 and an approximately 28% A-H premium assumption to bridge valuations and target prices between the two listed share classes.

Asset mapping & comparison

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

• Pharmaron (3759.HK)

  The report’s primary covered security, with CDMO growth, project conversion, and margin improvement forming the positive thesis.

  Strengths

  1H26 CDMO revenue increased 32.8% YoY, new purchase orders increased 50% YoY, and the company has 45 PPQ and commercial validation projects.

  Weaknesses

  Capital expenditure rises to approximately Rmb3.6bn in 2026, and returns on new capacity depend on commercial contracts and timely project conversion.

  Comparison

  The valuation uses an RMB/HKD exchange rate of 1.1 and an approximately 28% A-H premium assumption; the rating is Overweight, with a target price of HK$35.60.

  Risks

  Further losses at overseas sites, project delays, longer order-confirmation cycles, intensifying domestic competition, and geopolitical and exchange-rate risks.

• Pharmaron (300759.SZ)

  It shares the same company operating fundamentals as 3759.HK, but the report assigns it a different security rating.

  Strengths

  Benefits from growth in Laboratory Services, CDMO, and Clinical Development, as well as potential improvement in the CDMO gross margin.

  Weaknesses

  The share price was Rmb47.98 as of August 21, 2026, above the report’s stated target price of Rmb41.3.

  Comparison

  The rating is Equal-weight; the report links the A- and H-share valuations using an approximately 28% A-H premium and an RMB:HKD assumption of 1.1.

  Risks

  The same as those for the overall company, including project delays, longer order cycles, domestic competition, losses at overseas sites, and exchange-rate and geopolitical risks.

Key data

• 1H26 revenue growth17.9%YoY growth
• 1H26 net profit growth7.0%YoY growth
• 1H26 adjusted net profit growth20.3%YoY growth
• 1H26 segment revenue growthLaboratory Services 13.7%; CDMO 32.8%; Clinical Development 13.8%All figures represent YoY growth
• 2026 revenue growth guidance15%—20%; 18%—23% at constant exchange ratesManagement’s raised full-year guidance
• 2026 segment growth guidanceLaboratory Services 10%—15%; CDMO above 30%; Clinical Development 10%—15%Management’s full-year guidance
• Capital expenditure budgetApproximately Rmb3.6bn in 2026; approximately Rmb2.6bn in 2025For expansion including small-molecule CDMO capacity in Shaoxing and Hangzhou
• CDMO project pipeline45PPQ and commercial validation projects as of mid-2026, covering APIs, intermediates, and drug products
• New purchase orders in 1H26+50%YoY growth
• CDMO gross margin target30%—35%Management expects this level to be reached over the next 2—3 years
• Revenue contribution from AIDD clients7%—8% of Laboratory Services revenueShare of orders from AIDD biotechnology companies
• 2026—2028 net revenue forecastsRmb16,950mn; Rmb20,118mn; Rmb24,067mnMorgan Stanley ModelWare table forecasts
• 2026—2028 EBITDA forecastsRmb3,963mn; Rmb6,440mn; Rmb8,100mnMorgan Stanley ModelWare table forecasts
• 2026—2028 ModelWare net profit forecastsRmb2,081mn; Rmb2,962mn; Rmb4,448mnModel net profit
• 2026—2028 P/E24.2x; 17.0x; 11.3xBased on the report’s valuation table
• 2026—2028 EV/EBITDA14.7x; 8.7x; 6.4xBased on the report’s valuation table
• 2026—2028 ROE13.8%; 17.1%; 21.9%The model forecasts capital returns to improve each year
• Key DCF assumptionsWACC 10.5%; perpetual growth rate 3.0%; RMB:HKD 1.1; A-H premium approximately 28%Base-case valuation scenario

Impact & implications

The report believes that new orders, 45 PPQ and commercial validation projects, and late-stage project conversion provide demand support for capacity expansion. If commercial contracts and the capacity ramp-up remain aligned, CDMO revenue scale, gross margin, and capital returns are expected to improve gradually. AIDD is currently more likely to increase the number of candidate molecules and demand for experimental services than to replace the traditional CRDMO process. However, higher capital expenditure also raises the requirements for order realization, project progress, and capacity utilization.

Risks

• Upside risks include an order recovery following an improvement in the domestic financing environment.
• Upside risks include stronger overseas demand following an easing of geopolitical pressure.
• Upside risks include securing more late-stage project orders with larger scale and higher margins.
• Upside risks include increased revenue contributions and margin improvement from emerging business units.
• Downside risks include further expansion of losses at overseas sites.
• Downside risks include project delays and longer order-confirmation and revenue-recognition cycles.
• Downside risks include deterioration in the domestic competitive environment.
• Downside risks include geopolitical and exchange-rate volatility.

What to watch

• Monitor whether growth in commercial contracts can keep pace with the accelerated ramp-up of new capacity.
• Monitor whether AIDD clients continue to expand Pharmaron’s project funnel and contribution to Laboratory Services revenue.
• Monitor whether the majority of projects currently at the PPQ stage can convert into late-stage and commercial orders from 2H26 onward.
• Monitor whether the CDMO gross margin can rise to 30%—35% over the next 2—3 years as management expects.