Incident Overview

On April 20 and April 27, 2023, Heyuan Biotech disclosed the 2022 annual report and the 2023 quarterly report respectively: in 2022, the company achieved revenue of 291 million yuan, an increase of 14.26% over the previous year; Guimo's net profit was 390.252 million yuan, a decrease of 28.07% over the previous year; after deducting net profit of 307.9952 million yuan from the previous year, a decrease of 24.87% over the previous year. In the first quarter of 2023, the company achieved operating income of 307.9914 million yuan, a year-on-year decrease of 57.89%; net profit of the mother was 31,743 million yuan; net profit of the non-return mother was 32.974 million yuan after deducting the net profit of the mother.

Incident reviews

Multiple factors are disrupted, and performance fluctuations are under pressure in the short term

Due to the epidemic and the downturn in the external economic market, the company has been affected to varying degrees in terms of market business expansion, capacity expansion, project delivery, etc. Operating costs have increased dramatically, operating profit and net profit have declined, and net cash flow from operating activities has decreased. In particular, some CDMO project delivery delays or order delays in the fourth quarter of 2022 led to a slowdown in revenue growth and an extended customer repayment cycle. The full year of 2022 achieved operating income of 291 million yuan, an increase of 14.26% over the previous year, and the net profit of the mother was 390.252 million yuan, a decrease of 28.07% over the previous year, after deducting net profit of 307.9952 million yuan from the previous year, a decrease of 24.87% over the previous year. The gross profit margin was 44.41% (year-on-year - 6.92 pp), and the net profit margin was 13.40% (year-on-year - 7.88 pp). In 2022, the sales expense ratio was 10.39% (+1.16pp year on year); the management expense ratio was 19.17% (+1.74pp); the R&D expense ratio was 11.96% (+2.69pp); the financial expense ratio was -9.42%; the net cash flow from operating activities was 21 million yuan, a decrease of 80.40% from the previous quarter. Looking at a single quarter, the 2022Q4 achieved revenue of 759.976 million yuan in a single quarter, a decrease of 16.51% over the previous year, and Guimo's net profit was 5.111,000 yuan, a year-on-year decrease of 79.71%, deducted from the previous year The net profit of non-return mothers was 2,092,500 yuan, a year-on-year decrease of 90.54%. The revenue of 2023Q1 in a single quarter was 307.914 million yuan, a year-on-year decrease of 57.89%; net profit of the mother returned to the mother was 31,743 million yuan; after deducting net profit of the non-return mother was 32.974 million yuan.

Looking at it by sector:

(1) Gene therapy CRO business: Achieved revenue of 658.998 million yuan in 2022, an increase of 19.36% over the previous year; 2023Q1 achieved revenue of 137.13,300 yuan, an increase of 24.21% over the previous year. The company further increased its market share on the existing basis, launched new “meta-carrier” brands and services, overcame the short-term adverse effects of the scientific research market, quickly responded to changes in demand, and took various measures to make up for it.

(2) Gene therapy CDMO business: Achieved revenue of 217 million yuan in 2022, an increase of 12.46% over the previous year; the 2023Q1 business segment achieved revenue of 15.5021 million yuan, a year-on-year decrease of 74.56%.

Affected by the economic downturn at home and abroad in 2022, in particular, business development was clearly blocked in the fourth quarter of 2022, leading to delays in delivery of some CDMO projects or delays in orders, and a slowdown in short-term business growth. The company is developing novel CDMO businesses such as stem cells, NK cells, and mRNA based on existing businesses such as oncolytic virus, AAV gene therapy, and CAR-T cell therapy, and the business space is expected to expand further.

Orders and production capacity: The Lingang base is about to be put into operation, further raising the production capacity barrier 2023Q1. The company supports CDMO customers to obtain 6 new IND approvals, add 1 new CDMO customer, and add more than 50 million yuan. As the Lingang Industrial Base is gradually put into operation, project orders are expected to recover quickly to better meet the rapidly growing demand for gene therapy CDMO. On April 21, 2023, the “Heyuan Zhizao Precision Medicine Industry Base” opened in the Lingang New Area of Shanghai, with a total investment of about RMB 1.5 billion, a total construction area of about 77,000 square meters, and the largest reactor can reach 2000L. It will continue to provide one-stop CRO/CDMO solutions from DNA to NDA for the global gene and cell therapy industry. As of March 31, 2023, the first phase of the project has invested more than RMB 700 million. The first phase of the construction process equipment line has been adjusted. On top of the original plan to build 11 virus production lines, a cell production line of about 5,000 square meters has been added. It is expected to be put into trial operation in the first half of 2023 and officially put into operation in the second half of 2023.

Personnel and R&D: Personnel reserves continue to expand, R&D investment continues to expand the company's team to release reserve talents for Lingang production capacity: As of 2023Q1, the total number of employees in the company was 648. At the same time, the company continued to expand recruitment channels, continuously attract diverse talents, and further enhance technical and management capabilities.

In terms of research and development of new technologies and processes, the company further increased its investment: 2023Q1. The company's R&D expenses reached 1,169,800 yuan, an increase of 58.80% over the previous year, and the R&D expenditure ratio was 36.60%.

Investment advice

We expect the company's revenue from 2023 to 2025 to 379/530/758 million yuan respectively; the year-on-year growth rate is 30.1%/39.8%/43.1%; the net profit of the mother is 0.45/0.59/88 million yuan, respectively; the net profit growth rate is 15.1%/31.1%/48.6%; the corresponding EPS for 2023-2025 is 0.09/0.12/0.18 yuan/share; the corresponding valuation is 192/147/99 times. Considering the company's first-mover advantage and capacity barriers in the CGT CXO field, we maintain the “increase in holdings” rating.

Risk warning

Risk of tightening industry regulatory policies; risk of downstream new drug development and commercialization falling short of expectations; risk of upstream procurement of raw materials and equipment; capacity expansion falling short of expectations; increased risk of industry competition; risk of investment and financing being disrupted.