Core views

On August 23, the company released its semi-annual report for 2023. The performance was lower than previous expectations, mainly due to the fact that the shutdown of production last year affected batch issuance and the high level of channel inventory affected the company's delivery. 23H1 continues to promote terminal sales of diploid seedlings. Remarkable progress has been made in developing terminal vaccination sites. Net sales have increased significantly year-on-year, and channel inventory levels have been optimized. The company has increased its R&D platform construction efforts, the R&D pipeline is progressing steadily, and the increase in R&D investment has a phased impact on profits. It is expected that in the second half of the year, with the improvement of channel inventories, the diploid fever will resume the pace of delivery, driving the company's performance to continue to grow. The R&D pipeline is progressing smoothly, which is expected to bring long-term growth impetus to the company in the future.

occurrences

The company released the 2023 semi-annual report. The performance fell short of previous expectations. On August 23, the company released the 2023 semi-annual report, achieving: 1) operating income of 634 million yuan, a year-on-year decrease of 3.84%; 2) net profit of 248 million yuan, a year-on-year decrease of 21.37%; 3) net profit of 234 million yuan after deducting non-attributable net profit of 234 million yuan, a year-on-year decrease of 22.41%; 4) basic earnings per share of 1.86 yuan. The performance fell short of previous expectations.

Brief review

Sales of diploid terminals continued to advance. Increased R&D investment affected the profit side in the second quarter of 2023. The company achieved operating income of 356 million yuan, a year-on-year decrease of 9.34%; net profit of 143 million yuan, a year-on-year decrease of 20.72%; 3) net profit of non-homologated net profit was 140 million yuan, a year-on-year decrease of 21.34%. The revenue side of the 23Q2 and 23H1 companies declined, and their performance fell short of expectations, mainly due to the year-on-year decline in batch issuance volume due to the shutdown of the diploid plant in July-September '22. Furthermore, sales of diploid freak seedlings slowed down last year, channel inventory levels were high, and the adverse impact on the company's delivery pace in the first half of the year was higher than expected. The decline on the profit side was mainly due to the company's increase in R&D investment in the first half of the year.

The batch issuance of diploid seedlings was affected by the shutdown of workshop production, and terminal sales continued to advance. 23H1. The company's core product, the freeze-dried human rabies vaccine (human diploid cells), was issued in batches of 2,636,600, a year-on-year decrease of 32.36%, mainly due to the company's discontinuation of production from July 4, 2022 to September 19, 2022 to upgrade the preventive maintenance workshop and water system. In terms of sales, the company continues to promote terminal sales for diploid fever. With the product's own advantages, extensive coverage of business channels, and good customer base relationships, it made significant progress in developing terminal vaccination sites in the first half of the year. Net sales increased by more than 20% year-on-year, and channel inventory levels were optimized.

The construction of R&D platforms has been stepped up, and the R&D pipeline is progressing steadily. With the construction of a vaccine research and development platform as the core, the company has laid out various innovative vaccine platforms such as mRNA vaccine platform, recombinant protein VLP vaccine platform, recombinant adenovirus vaccine platform, polysaccharide-conjugated vaccine platform, live attenuated vaccine platform, inactivated vaccine platform, and novel vaccine adjuvant platform. 23H1 invested 106 million yuan in R&D, an increase of 55.17% over the previous year. The company is steadily advancing the research pipeline. Among them, the recombinant hexavalent noro vaccine obtained approval for phase I clinical trials in Australia in February 2023. The company is actively promoting clinical research on this product and clinical reports in other countries and regions. A number of other research pipelines are expected to report or conduct clinical trials from 2023 to 2024.

R&D expenses have increased significantly, and net operating cash flow has improved

23H1 achieved gross profit of 593 million yuan (-4.25%) and a gross profit margin of 93.52% (-0.40 pp), which is basically the same as the same period last year. 23H1 has sales expenses of 175 million yuan (+14.17%), sales cost ratio of 27.60% (+4.35 pp); management expenses of 40 million yuan (+2.17%), management cost rate of 6.38% (+0.38 pp); R&D expenses of 106 million yuan (+55.17%), R&D expenses rate of 16.68% (+6.34pp); financial expenses - 0.04 billion yuan (-53.347%), financial cost rate -0.59% (+0.63pp). The company continued to increase investment in R&D, which led to a sharp increase in R&D expenses and an increase in the R&D cost rate; the increase in sales cost rate was mainly due to the company's continuous promotion of terminal sales; the rest of the expenses remained stable. The company's net operating cash flow was 122 million yuan, an increase of 281.76% over the previous year, mainly due to the increase in cash received by the company from selling vaccine products compared to the same period last year.

Profit Forecasts and Investment Ratings

As the company with the first diploid fever product in China, the company continued to promote terminal sales of diploid seedlings in the first half of 2023, and made significant progress in vaccination site development and net sales. It is expected that in the second half of the year, with channel inventory improvements, diploid fever will resume the pace of delivery, driving the company's performance to continue to grow. As the company continues to increase investment in R&D, the R&D pipeline is progressing smoothly, which is expected to bring long-term growth impetus to the company in the future.

We expect the company to achieve operating income of $1,587 million, $1,842 million and $2.102 billion respectively in 2023-2025. Excluding changes in fair value and fluctuations in investment income, net profit to be 583 million yuan, 682 million yuan, and 787 million yuan, respectively, up 7.0%, 17.0% and 15.3% year-on-year, respectively.

The equivalent EPS was 4.33 yuan, 5.07 yuan, and 5.84 yuan, respectively, and the corresponding PE was 13.9X, 11.9X, and 10.3X, respectively, maintaining the purchase rating.

Risk analysis

1. The batch issuance speed fell short of expectations: The company's diploid fever was affected by the epidemic in '22, and delivery and sales progress slowed down; if the batch issuance progress falls short of expectations, the company's performance will be adversely affected.

2. Risk of product price fluctuations: Prices of listed products may fluctuate. If the price drops significantly, it will affect the company's revenue and profit expectations, which in turn affects valuation.

3. Product safety risk: Vaccines have certain safety risks due to their special biological characteristics. If a vaccine safety incident occurs, it will not only adversely affect the operation and production of the enterprise itself, but may also cause fluctuations in the vaccine industry.

4. Market competition is becoming fierce: Currently, many vaccine companies are already in the final production stage or clinical phase III. In the future, after listing, there may be a competitive relationship with the company's main products, which will affect the company's performance growth.