Incident: The company released its 2023 annual report, and 23H1 achieved operating income of 685 million yuan, an increase of 14.1% over the previous year; Guimu's net profit was 87.75 million yuan, a year-on-year decrease of 27.3%.

Operation exceeded expectations in 23Q2, and the release of ciclosporin continued to accelerate. The company's annual revenue for 23H1 was 685 million dollars (+14.1%), and net profit for return was 87.75 million (-27.3%); of these, 23Q2 revenue was 399 million (+33.6%), and net profit of 68.41 million yuan (+47.2%), all exceeding expectations. Looking at the revenue distribution structure, pharmaceutical manufacturing achieved revenue of 515 million yuan (+38.4%) and medical service revenue of 156 million yuan (-28.9%); among them, realized revenue from gels/eye drops and eye drops in pharmaceutical manufacturing was 177 million yuan and 314 million yuan respectively, with year-on-year growth rates of 17.8% and 60.4%, respectively. The high growth rate of eye drops is mainly due to the fact that ciclosporin eye drops, the first drug similar to dry eye, continued to be released rapidly after being added to the medical insurance negotiation list in 2021. Relying on the huge dry eye market and first-rate status, it is expected that it will be released even more rapidly in '23. The decline in medical service revenue is mainly due to the new policy on sales of low-concentration atropine in-hospital preparations; in July 2022, a new policy for online hospitals was introduced, prohibiting the sale of in-hospital preparations through Internet hospital channels. This policy will have a certain impact on the company's revenue and profit in 23 years. The gross margins of the two major business segments, pharmaceutical manufacturing and medical services, fell 3.0 pct and 5.1 pct, respectively, year on year, with a slight decline. Expense rate situation during the period: 1) The sales cost rate was 39.6%, an increase of 6.0 pct over the previous year, mainly due to the high increase in eye drops; 2) the R&D cost rate reached 11.3%, an increase of 2.9 pct, mainly due to an increase in R&D investment.

The low concentration of atropine exceeded expectations and was accepted for the NDA, which will drive explosive growth in revenue and performance. On April 25, the company announced that its atropine sulphate eye drops (0.01%) application for NDA was officially accepted by the State Drug Administration, and that the 10 billion grade single product was officially approved and anticipated. According to our forecast, the prevention and control of low concentrations of atropine myopia is mainly used for children and adolescents aged 5-16. The total number of people with myopia in this age group is nearly 100 million; currently, the annual cost of preparations in mainstream atropine hospitals is about 3,600 yuan. Under neutral circumstances, we expect Xingqi products to reach a peak sales value of 10.18 billion yuan in the 3rd full year of marketing (that is, 2027), which will reshape the ophthalmic drug market pattern.

Investment advice: Without considering that atropine was approved in 2024Q1, the company is expected to achieve revenue of 15.1/20.0/2.63 billion yuan in 2023-2025, achieve net profit of 30/4.3/570 million yuan, and maintain a “buy” rating.

Risk warning: Atropine approval progress is lower than expected; competition for cyclosporine eye drops intensifies or there is a risk of price reduction in collection; promotion and sales of traditional eye medicine products fall short of expectations and the risk of entry into collection.