Incident: The company released its semi-annual report for 2023, with operating income of 171 million yuan, -20.18%; net profit of 68 million yuan, -3.873% of the same period; net profit of 67 million yuan after deducting non-return net profit of -30.54%; net operating cash flow of 111 million yuan, -26.38% of the same period; and EPS (basic) of 1.13 yuan. The performance fell short of market expectations.

Comment:

Revenue from technical services has declined significantly, and revenue from medical devices has increased steadily. The company's 23H1 main business revenue was -20.18% year-on-year. The decrease was mainly due to a decrease in order delivery for major downstream customers and a decrease in technical service revenue. Among them:

1) Product sales revenue was 155 million yuan, -17.23% year-on-year. Among product sales revenue, domestic sales revenue was 68 million yuan, -12.28% year-on-year, mainly due to a decrease in the number of orders required to be delivered by major domestic downstream customers in 23H1; export revenue was 0.87 billion yuan, -20.70%, mainly due to a decrease in LNP (lipid nanoparticle) revenue and a decrease in the number of orders delivered by downstream pharmaceutical companies compared to the same period last year due to R&D progress and stocking conditions. 23H1. Foreign medical device sales revenue maintained steady growth over the same period last year. Excluding the impact of LNP sales revenue, foreign product sales revenue was +2.05% year-on-year.

2) Technical service revenue was 316 million yuan, or -40.70%, mainly due to a sharp decrease in technical service revenue from Tebao Biopolyethylene Interferon α-2b injection due to patent expiration.

The core is that the research product polyethylene glycol irinotecan has made great progress, and medical and aesthetic projects are progressing in an orderly manner. The company's 23H1 R&D expenses were 28 million yuan, or -34.35% year-on-year, accounting for 16.44% of revenue. The reduction in R&D expenses is related to the R&D stage and progress of the company's main R&D projects. Some projects are in the data compilation stage at 23H1, and the cost investment is low. As of 6/30/23:

1) Polyethylene glycol irinotecan: Regarding small cell lung cancer indications, the first draft of the phase II clinical trial summary report has been completed; the phase III clinical trial is being prepared for implementation; with regard to glioma indications, the first phase of patient enrollment is ongoing, and some patients have already entered survival follow-up.

2) Medical Aesthetic Project JK-2122H: Clinical trials are ongoing, participants have been enrolled, all clinical centers have entered a six-month clinical follow-up period, and clinical trials are expected to be completed in November 2023.

Profit forecast, valuation and rating: As a result of patent expiration, technical service revenue from Tebao Biotech has been drastically reduced, so we lowered our net profit forecast for 2023-2025 to 178/2.10/289 million yuan (the original forecast was 263/328/437 million yuan, down 32%/36%/34%, respectively), and the corresponding PE price was 32/ 27/20 times, respectively. Considering that the company's current business competition pattern is excellent and technical barriers are deep, the drug and device projects in the R&D market have rich application space and maintain “buy” ratings.

Risk warning: risk of failure in innovative product development; risk of core technology iteration.