Citi: Pharmaron’s order growth diverges: CDMO expands as currency movements weigh on laboratory margins

Where is growth coming from?

Management reiterated confidence in its guidance for year-on-year revenue growth of 15%–20% in 2026. Revenue from the world’s top 20 pharmaceutical companies rose 52.5% year on year in the first three quarters, which Citi believes reflects the company’s continued gains in share among major pharmaceutical companies.
Laboratory services revenue was 2.6 billion yuan in the third quarter, up 17.5% year on year. New orders rose more than 25% year on year, accelerating from over 20% in the first half, driven by demand for AI-assisted drug discovery and development (AIDD) and orders from multinational pharmaceutical companies. Management said AIDD customers contributed more than 8% of laboratory services revenue in the first three quarters.

Laboratory services gross margin was 39.1% in the third quarter, down 3.4 percentage points year on year, mainly reflecting the impact of the renminbi’s appreciation against the US dollar. Management estimates that exchange rates reduced the company’s revenue by about 4% and gross margin by about 2 percentage points in the first three quarters.
CDMO revenue was 1.2 billion yuan in the third quarter, up 30% year on year, and gross margin rose to 31.1%, an increase of 1.6 percentage points year on year. Citi expects CDMO gross margin to improve further as late-stage and commercial projects ramp up; such projects are expected to account for more than 20% of the business’s revenue in 2026.
CDMO new orders rose more than 40% year on year in the third quarter, down from more than 50% in the first half. Management attributed the slowdown to quarterly fluctuations and a high base, and guided for the business’s revenue to grow by more than 30% in 2026.

Management said capacity utilisation was high in 2026 and the production schedule for 2027 was nearly full. The company plans capital expenditure of 3 billion yuan in Shaoxing and expects small-molecule reactor capacity to double from 1,200 cubic metres within three years. A new solid-phase synthesis facility for peptide active pharmaceutical ingredients is scheduled for completion in the second half of 2026.
The company issued convertible bonds in September, raising net proceeds of 327 million US dollars, most of which will be used to expand laboratory and CDMO capacity.

Citi forecasts year-on-year revenue growth of 19% in both 2026 and 2027, with earnings per share rising 20% and 39%, respectively. The bank raised its gross margin forecasts while incorporating higher foreign exchange losses into its model.
Citi maintained its buy ratings and target prices of 55 renminbi for the A shares and 62 Hong Kong dollars for the H shares. It considers the H shares more attractive: their forecast price-to-earnings ratio for 2027 is 16 times, versus 28 times for the A shares.