Zhitong Decision Reference | Market confidence has been boosted, with a continued focus on the technology sector

[Editor’s Market View]

The timely convening of a key meeting has boosted market confidence. The Hang Seng Index returned to above the 26,000-point mark last week.

Over the weekend, the economic and trade teams of China and the United States held in-depth and candid discussions and exchanges on trade issues of mutual concern. A preliminary consensus was reached. U.S. Treasury Secretary Janet Yellen: The U.S.-China trade negotiations have established a "very successful framework." In simple terms, both sides have found some areas where consensus can be easily reached, while other directions need to wait for the leaders' meeting to be determined.

The U.S. CPI rose 3% year-on-year in September, the highest since January this year, but lower than the market expectation of 3.1%; the core CPI slowed to 0.2% month-on-month, also below market expectations, which has strengthened Wall Street's confidence in a rate cut by the Federal Reserve.

In the early hours of October 30, Beijing time, the Federal Reserve is expected to cut rates by another 25 basis points.

Central Bank: To grasp the strength, timing, and rhythm of monetary policy, maintaining the stable operation of financial markets such as the stock market, bond market, and foreign exchange market. From the above, it can be seen that this week is generally favorable, but the most significant factor will be whether the Chinese and U.S. leaders will further discuss at the APEC meeting. As long as talks can take place, it will be a positive for the market. Meanwhile, the state visit to South Korea on October 30 is also expected to achieve phased results.

The market focus remains on technology. From October 27 to 29, Jensen Huang will attend NVIDIA GTC and deliver a keynote speech. The theme of this conference also involves quantum computing. NVIDIA's official WeChat account hinted that the era of physical AI is coming: simulation first, cloud training to edge deployment, and embodied intelligent robots are moving towards efficient implementation. In the field of photoresists, our country has made new breakthroughs. It is expected that chips and AI will continue to catalyze; JD Logistics plans to purchase 3 million robots in the next five years. Robotics is also an important direction for the 14th Five-Year Plan; cooperation between China and South Korea or the direction of the China-South Korea Free Trade Zone is also worth close attention.

[This Week's Golden Stock]

WuXi AppTec (02359)

Q3 net profit margin further improved year-on-year and quarter-on-quarter. The company achieved revenue of 32.86 billion yuan (+18.6%, continuing operations +22.5%) in the first three quarters. Adjusted Non-IFRS net profit attributable to the parent was 10.55 billion yuan (+43.4%), with a Non-IFRS profit margin of 32.1% (up 5.6 points year-on-year). In Q3, revenue reached 12.06 billion yuan (up 15.3% year-on-year, continuing operations up 19.7% year-on-year, up 8.2% quarter-on-quarter), with adjusted Non-IFRS net profit of 4.22 billion yuan (up 42.0% year-on-year, up 16.1% quarter-on-quarter), and a Non-IFRS profit margin of 35.0% (up 6.6 percentage points year-on-year, up 2.4 percentage points quarter-on-quarter).

Raised the full-year revenue growth guidance to 17-18% (originally 13-17%), with overall revenue guidance of 43.5-44 billion (originally 42.5-43.5 billion), confident in further improving the adjusted Non-IFRS net profit margin. Due to production cycle reasons, CAPEX is expected to be adjusted down to 5.5-6 billion (originally 7-8 billion), and free cash flow is raised to 8-8.5 billion (originally 5-6 billion) Q3 orders showed strong growth, mainly benefiting from robust demand for small molecule orders, with a significant increase in gross margin. As of Q3 2025, the backlog of orders reached 59.88 billion yuan (+41.2%). The chemical business continued to grow driven by the CRDMO model, with revenue for the first three quarters of 2025 at 25.98 billion yuan (+29.8%). WuXi Chemistry's adjusted non-IFRS gross margin for the first three quarters continued to improve to 51.3%, up 5.8 points year-on-year; Q3 revenue was 968 million yuan (up 22.8% year-on-year, up 8.6% quarter-on-quarter), with the non-IFRS gross margin for Q3 rising to 55.2%, up 7.1 points year-on-year and up 4.9 points quarter-on-quarter.

Revenue Breakdown: TIDES High Prosperity. Revenue from the R-end for the first three quarters was approximately 3.9 billion yuan (down approximately 4.3% year-on-year), with Q3 revenue at 1.309 billion yuan (down 1.9% year-on-year, up 1.4% quarter-on-quarter); revenue from the DM-end for the first three quarters was 14.24 billion yuan (+14.2%), with Q3 revenue at 5.56 billion yuan (up 9.4% year-on-year, up 15.1% quarter-on-quarter); Tides revenue for the first three quarters was 7.84 billion yuan (+120.8%), with Q3 revenue at 5.56 billion yuan (up 9.4% year-on-year, up 15.1% quarter-on-quarter). As of the end of September, Tides' backlog of orders increased by 17.1% year-on-year; the number of clients served increased by 12% year-on-year, and the number of molecules served increased by 34%; as of Q3, the peptide production capacity construction in Taixing was completed ahead of schedule: the overall volume of the company's peptide solid-phase synthesis reaction kettle has increased to >100,000L.

Asset Sale, Focus on Core Business. The company announced plans to sell its CRO+SMO business to Hillhouse Capital to further focus on its CRDMO core business, with the related business to be included in the discontinued operations section of the 2025 annual report.

【Industry Observation】

A mainland fund company commented on the recent continuous decline of innovative drugs in the Hong Kong stock market as follows:

In addition to the commonly perceived reasons such as short-term profit-taking by funds and overseas policy impacts, there are also some non-consensus reasons.

1. Changes in foreign pricing logic: A significant feature of Hong Kong's pharmaceutical market is that foreign capital dominates pricing, with its pricing power even exceeding that of the Hang Seng Technology Index. Recently, companies like Innovent Biologics received large BD orders, but their stock prices opened high and then fell, which may indicate a change in foreign capital's valuation of the innovative drug BD overseas model, treating "clear" good news as an opportunity to offload.

2. Market game behavior: From some foreign capital data disclosed by the Hong Kong Stock Exchange, leading foreign investors like BlackRock frequently enter and exit, such as "buying low" during a sharp decline on October 10 and "selling high" on October 16. This creates a certain level of speculation in the performance of innovative drugs in Hong Kong, as seen on October 22 when Innovent Biologics opened high and then quickly plummeted, dragging down the entire innovative drug sector, possibly due to speculation among foreign investors.

3. Risks of concept speculation becoming apparent: Some "three-no" innovative drug companies, which have no revenue, no products, and no BD, exhibit signs of valuation bubbles. Early-stage clinical companies may be overestimating their chances of success over the next 3-5 years, leading to an imbalance in risk-reward ratios. In a cautious market sentiment, these companies are prone to capital sell-offs, which can further impact the performance of the entire innovative drug sector

4. Intensified industry competition: Some pharmaceutical companies' interim reports reveal weak profitability, such as the sharp decline in sales of Hutchison China MediTech's core product, fruquintinib, and the revenue drop of Zai Lab's PARP inhibitors, reflecting the fierce competition in the innovative drug market. Concerns about the shift from a cash-burning growth model to a cost-control survival strategy will also lead to a decline in investor confidence in the innovative drug sector.

【Data Overview】

According to data released by the Hong Kong Stock Exchange, the total number of open contracts for the Hang Seng Index futures (October) is 93,246, with a net open position of 30,158. The settlement date for the Hang Seng Index futures is October 30, 2024. This week’s index futures settlement.

The Hang Seng Index is at 26,160 points, with a dense area of bearish certificates near the midpoint, indicating potential for bullish momentum. The market is focused on the results of the China-U.S. trade negotiations, and with the Federal Reserve poised to continue lowering interest rates, the Hang Seng Index is bullish this week.

【Editor's Remarks】

As the year-end approaches, various institutions are seeking to narrow their risk exposure. Attention should be paid to market style shifts, as low-valuation and dividend-style stocks may regain favor and show an upward trend