FY2024 Earnings Interpretation by Jason

$XTALPI(02228.HK)

Conclusion: This earnings report reflects "improved operating structure but deteriorating financial quality." It is not a thesis break, nor is it by any means a pretty report.

The most valuable change is that AI4S has evolved from a narrative into a business contributing nearly half of revenue; the most dangerous change is that growth is increasingly reliant on low-margin, delivery-heavy robotic labs and large-scale R&D investment.

Breaking down the headline

• H1 revenue **RMB 393.6 mn, -23.9% YoY**; net loss attributable to shareholders RMB 251.9 mn, falling within the previously warned range of RMB 215–275 mn, with no new surprises.
• The company's reported net loss is RMB 224.9 mn; the higher attributable loss stems from minority interests recording a profit of RMB 26.96 mn. This explains the discrepancy between the two loss figures in news reports.
• Adjusted net loss stands at RMB 105.5 mn, but this figure still includes RMB 154.2 mn in fair value gains on financial assets. Excluding this item, core operating losses are closer to RMB 260 mn. Thus, one should not be comforted by the notion that "adjusted losses are modest." [1]

The real highlight: AI4S commercialization accelerating significantly

• Revenue from AI4S Intelligent Solutions reached **RMB 193.5 mn, +136.4% YoY**, accounting for approximately **49%** of total revenue.
• Growth was driven by both new customer acquisition and repeat purchases from existing clients; the Lilly project was completed, and semi-standardized intelligent synthesis workstations have been replicated across 13 client sites.
• The company's claim that "revenue grew +73.8% excluding last year's large license deal" is correct, but the structure must be scrutinized: after excluding pipeline payments, drug discovery revenue increased only marginally from RMB 70.1 mn to RMB 70.7 mn, showing virtually no growth; roughly 99% of this incremental volume came from AI4S. [1]

In other words:

AI4S is no longer just a supporting act; however, the core drug discovery service line has not seen synchronized growth.

The biggest issue: Significant decline in revenue quality

• Gross margin dropped from ~**84.2% to 57.4%**; cost of revenue surged **+104.8% YoY**, far outpacing revenue growth.
• This is not solely due to last year's high base from license fees, but also because AI4S robotic labs require hardware, project implementation, and fulfillment costs. While this validates demand, the business model currently resembles high-growth scientific infrastructure integration rather than pure software.
• R&D expenses totaled **RMB 367.8 mn, +66% YoY**, equivalent to **93%** of revenue; operating cash flow saw a net outflow of **RMB 399.2 mn, widening 67% YoY**. [1]

Good news: No short-term liquidity concerns

• Broad cash balance stands at RMB 8.671 bn, with total borrowings of RMB 2.990 bn, resulting in a net cash position of approximately RMB 5.681 bn.
• Thus, the immediate concern is not survival risk, but capital efficiency: can such a substantial cash pile translate into replicable revenue, gross margin recovery, and genuine pipeline milestones? [1]

Interpreting the stock price reaction

The stock closed today at **HK$7.23, down 3.6%**; having retraced about **13.2%** from its August 11 high of HK$8.325. Since the earnings were released post-close, today's drop reflects pre-earnings risk aversion rather than a full market vote on the official numbers. [2]

With a current market cap of approx. HK$31.1 bn, this performance:

• Preserves the bulls' most critical argument: rapid revenue realization from AI4S;
• Provides bears with their strongest evidence: shrinking margins, expanding cash burn, and adjusted profits inflated by investment gains.

My assessment: Neutral-to-positive, but without increased conviction

• On long-term logic: Positive, as AI4S has truly entered commercialization.
• On profitability model: Negative, as high growth has yet to generate operating leverage.
• On near-term trading: If the stock dips to around HK$7.0 but quickly recovers, investors should not succumb to headline-driven panic; however, if it breaks below HK$6.8 on heavy volume, it signals the market is re-pricing the company as a "hardware integrator" rather than an "AI4S platform."
• Conditions for upgrading my view: Continued AI4S growth, stabilization and recovery in gross margins, and renewed growth in drug discovery revenue (excluding license fees) in the next reporting period.

A conference call is scheduled for 19:00 tonight. The three key takeaways to listen for are:

1. Revenue and gross margins for each of the two AI4S sub-businesses;
2. Order backlog and revenue recognition pace for H2;
3. When R&D growth will peak. [3]

Sources

[1] XtalPi 2026 Interim Results Announcement
[2] Longbridge 2228.HK Quote (1/2)