Core views

Chutian Technology's total revenue for the first half of the year was 3.356 billion yuan (+16.92%), net profit for the first half of the year was 267 million yuan (-10.82%), revenue for the second quarter was 1,802 million yuan (+20.05%), and net profit for the second quarter was 133 million yuan (-21.84%). The decline on the profit side was mainly due to fluctuations in gross margin and increased financial expenses. We are optimistic about the company as a leading domestic pharmaceutical equipment enterprise. With the gradual recovery of prosperity in the downstream domestic biomedical market and the company's further expansion in overseas markets, we will jointly promote the return of steady growth in the company's performance.

occurrences

On August 22, Chutian Technology announced its annual report for 23 years. Total operating revenue was 3.356 billion yuan, up 16.92% year on year, and net profit was 267 million yuan, down 10.82% year on year.

Brief review

Performance is basically in line with market expectations. The pharmaceutical water equipment sector grew rapidly. The company's total revenue in the first half of the year was 3.356 billion yuan, an increase of 16.92% over the previous year, and net profit of 267 million yuan, a year-on-year decline of 10.82%. Revenue for the second quarter was 1,802 billion yuan, up 20.05% year on year, and net profit for the second quarter was 133 million yuan, down 21.84% year on year. The decline on the profit side was mainly due to fluctuations in gross margin and increased financial expenses. In various segments, sterile formulation solutions and stand-alone machines were 888 million yuan, up 30.04% year on year, bioengineering solutions and stand-alone machines were 602 million yuan, up 32.81% year on year, and pharmaceutical water equipment and engineering system integration was 451 million yuan, up 102.33% year on year. The main reason for the rapid growth was that the company increased its market development efforts and deepened the technical layout of front-end biopharmaceutical production. The company's production equipment such as sterile preparations, solid preparations, and pharmaceutical water has been recognized by customers, further enhancing the company's product brand image.

Changes in the product structure and increased market competition caused the company's overall gross profit margin in the first half of the year to be 33.88%, down 3.55 percentage points from the previous year. Among them, pharmaceutical water equipment and engineering system integration fell 7.96%, bioengineering solutions and stand-alone machines fell 6.11%, and solid formulation solutions and stand-alone machines fell 5.18%, mainly due to slow global economic growth, intense competition in the same industry market, and reduced gross profit margin for customer orders.

The company has always adhered to the “one vertical, one horizontal, one platform” strategic layout to promote the pharmaceutical industry 4.0. First, the company has basically opened up the water agent equipment product chain, has the ability to provide products and services such as design, water production, liquid dispensing, packaging, freeze-drying, testing, back packaging, warehousing and logistics, etc., and is forming a team to complete the final shortcomings of the purification project. One level: The company currently has special production equipment for chemical raw materials, biopharmaceuticals, traditional Chinese medicine tablets and proprietary Chinese medicines. At the same time, the company has expanded its solid formulation process product line through the acquisition of Romaco, Germany, and has entered the field of solid formulation equipment. One platform: includes design, verification, engineering, equipment, consulting services, etc., to achieve the integration of intelligence and mobile Internet. The company has built an “intelligent smart pharmaceutical factory” through multiple layouts, including the acquisition of the Sichuan Pharmaceutical Design Institute, strategic cooperation with Siemens, and the establishment of Chutian Robotics.

Focus on the bioengineering sector, and competitiveness continues to improve

In the previous year of '23, the company basically completed the bio-front-end related layout of disposable bioreactors, disposable dispensing systems, ultrafiltration chromatography and purification, stainless steel reactors, and fillers. Based on this, in April of this year, the company set up Chutian Keyi. Its main business is scientific instruments such as high-end centrifuges, to further overcome stalled projects in the front-end field of bioengineering. In June 2023, the company established Chutian Jingbang. Its main business is purification engineering, EPC engineering, etc. At the same time, Chu Tiansi Weikang released three main equipment: an automated cellular drug preparation system — an intelligent cell centrifuge system, an intelligent cell magnetic sorting system, and an intelligent cell culture factory, to provide equipment solutions for the entire process from R&D to production of cellular drugs. At the same time, in the first half of this year, the company set up a biopharmaceutical process research center, focusing on biopharmaceutical process development and expansion, process technology consulting services, and R&D, testing and verification of new pharmaceutical equipment products. It can undertake R&D platforms connecting with pharmaceutical companies and research institutes. It aims to solve key challenges in process development and production for global biomedical customers. The company's front-end biopharmaceutical competitiveness continues to improve.

Future outlook: Orders will continue to recover, and overseas markets will continue to gain strength. Chutian Technology's new orders and high-end customers will all be at a level of growth. In terms of profit, gross margin is expected to remain at the level of the first half of the year. In the future, Chutian Technology plans to expand the number of suppliers on the purchasing side to form a scale effect and further reduce external procurement costs, thereby increasing gross margin space. In terms of net interest rates, Chutian Technology's future plans are based on increasing the salaries of R&D personnel and maintaining the salaries of other personnel to improve the efficiency of personnel in various departments in order to achieve the goal of increasing net interest rates. As for the overseas subsidiary ROMACO, orders have begun to resume compared to last year. Annual orders are expected to increase by more than 20%. Specific financial data is expected to be reflected in 2024. The company expects ROMACO's gross margin and net interest rate for the full year of 2023 to increase, and ROMACO expects annual sales to reach the level of 500 million euros in the next 5-10 years. In terms of overseas markets, overseas orders continue to rise, and the main direction of the company's future overseas markets will be the US and Europe. In the Southeast Asian market, the company plans to focus on Russia and India.

Financial analysis: The sales expense ratio declined, the R&D and management expenses rate remained stable. The company's sales expenses were 318 million yuan, down 0.83% year on year, and the sales expenses rate was 9.5%, down 1.7 percentage points from the previous year; mainly due to increased market competition and a decrease in high-margin orders, which led to a decrease in sales staff remuneration; management expenses of 208 million yuan, an increase of 13.29% over the previous year, and a 6.2% year-on-year decrease. The increase in expenses was mainly due to the introduction of senior management personnel and a stable core management team. Increased costs. R&D expenses were 269 million yuan, an increase of 16.24% over the previous year, and an R&D cost rate of 8.0%, which is basically the same as the same period last year. The year-on-year increase in expenses was mainly due to the company continuing to increase investment in R&D. In addition to introducing high-end technical talents, the R&D team also recruited more than 200 recent graduates for R&D positions this year, injecting fresh blood and reserve strength into the R&D team, as a talent reserve for the company's future technology research and development capabilities, leading to an increase in remuneration costs. Financial expenses were 31.81 million yuan, compared to -3.02 million yuan for the same period last year. On the one hand, changes in financial expenses were due to an increase in corporate loans in the first half of this year, which led to an increase in interest expenses on loans; on the other hand, exchange losses increased due to fluctuations in foreign currency exchange rates in the first half of this year. Contract liabilities amounted to 2,554 million yuan, a year-on-year decrease of 3.21 percentage points, mainly due to the company's increased delivery and commissioning efforts, confirmed revenue for projects completed in the first half of this year, and at the same time carried forward corresponding contract liabilities simultaneously. The company's inventory was 3,221 million yuan, a year-on-year decrease of 0.97 percentage points, mainly due to the company's early strategic reserve reserves and the slowdown in the global supply chain tension. The company slowed down the raw material procurement process and increased the commissioning and delivery of products, which led to a decline in inventory.

Profit forecasts and investment advice

Chutian Technology is one of the leading enterprises in the domestic pharmaceutical equipment industry. It will continue to benefit in the context of the long-term trend of localization and substitution. We expect the company's revenue from 2022-2024 to be 7.75 billion yuan, 9.18 billion yuan, and 10.75 billion yuan, and net profit of 626 million yuan, 782 million yuan, and 895 million yuan respectively, corresponding to 11, 9, and 7 times PE, maintaining a “buy” rating.

Risk analysis

1). The risk of import substitution falls short of expectations. Due to the disruption of the COVID-19 pandemic, the international logistics supply chain has been greatly affected, and the market share of domestic brands in the industry will gradually increase. However, with the gradual improvement of the epidemic and the gradual recovery of overseas supply chains, the trend of domestic substitution in the field of upstream equipment and consumables may be impacted by the recovery in imported supply.

2). The risk of increased competition in the industry. The domestic equipment and consumables market is dominated by importers, and the market share of domestic enterprises is low. If domestic enterprises fail to improve their R&D capabilities and product quality, the company will face unfavorable competition in the industry, which in turn will lead to a decline in performance.

3). The progress and quantity of new drug research and development for downstream domestic customers fell short of expectations. The progress of domestic clinical project research and development in the fields of biopharmaceuticals and cell and gene therapy and the increase in the number of pipelines falling short of expectations will affect the company's further development of engineering equipment.