Judging from the number of project pipelines and customer commercialization project volume trends, the company's CDMO business is expected to continue to grow rapidly and increase its share of revenue; at the same time, the API business is expected to gradually stabilize. Overall, we expect the company's performance for the full year of 2023 to continue to grow. From a medium- to long-term perspective, the company's globally competitive process development and production capabilities (D and M) are expected to be realized in various fields — the implementation and volume of more CDMO post-clinical stages and commercialization projects, generic drug ingredient integration projects bringing new growth, etc. — will all drive the company to open up room for future business growth, with strong certainty about medium- to long-term growth. In summary, we gave the company 23 times PE in 2024, corresponding to the target price of 39 yuan, to maintain the “buy” rating.
Revenue fluctuated due to macro-impact on the specialty APIs business, and overall profitability/profit margin continued to increase.
In the first three quarters of 2023, the company's operating income was 4,577 billion yuan, +4.66% year-on-year; net profit of 967 million yuan/952 million yuan was attributed/net profit of 967 million/952 million yuan, +30.08%/+24.75% over the same period last year. Operating income for 23Q3 alone was 1,322 million yuan, -6.79% year-on-year; net profit of 345 million/339 million yuan, net profit of net income of 345 million yuan/339 million yuan, +25.39%/+15.16% over the same period last year. We judge that the main reason for the slight year-on-year decline in 23Q3 revenue was that the specialty APIs business was affected by a certain macroeconomic environment.
In terms of profitability: In the first three quarters of 2023, the company's gross margin/net interest rate/ net interest rate after non-return was 39.31%/21.12%/20.79%, year-on-year +4.59/+4.13/+3.35 pcts; 23Q3 gross margine/net interest rate/ net profit margin minus non-return net interest rate were 41.54%/26.10%/25.64%, year-on-year +7.67/+6.70/+4.88pcts. We believe that the increase in profitability is mainly due to the increase in the share of CDMO business revenue, the positive impact of the exchange rate, and the improvement of the company's overall operating efficiency. The company's expense ratio remained stable in the first three quarters of 2023. Sales/management/R&D/financial expenses were 1.42%/7.96%/5.24%/-1.24%, respectively, +0.25/- 0.63/+0.04/+0.89pct (total +0.55pct).
New production capacity+new molecules+new businesses continue to be built, demonstrating the high certainty of medium- to long-term growth - CDMO production capacity continues to be put into operation, and the newcomer business is expected to open up a new growth curve. As of 2023Q3, the main construction of the production workshop and supporting facilities of Ruibo Taizhou (Phase I) has been completed and has gradually begun to enter the equipment installation stage; the installation of the main equipment in the synthesis reaction zone of Ruibo's Suzhou pilot plant has been completed, and various regions have been put into use one after another (corresponding annual production capacity of peptides is about 100 kg); the pharmaceutical technology workshop has been upgraded and put into use; Ruibo US has carried out the second phase of the pilot plant installation design work, which will significantly enhance the ability to undertake US projects.
According to the company's semi-annual report, the company has built a technology platform for the development of polypeptide drugs and conjugated drugs: the polypeptide platform has undertaken and delivered customized peptides and new peptide drug IND commissioned research and development services for many new drug research and development companies, and has helped customers apply for various projects at home and abroad.
——Mergers and acquisitions+self-construction to strengthen pharmaceutical business capabilities. The company successfully completed the handover and integration of 100% of Ruihua Zhongshan's shares in the first half of the year. After the handover was completed, the company completed further integration of the R&D and production business flows of Kangchuanji Pharmaceutical, Siwei Pharmaceutical, and Ruihua Zhongshan APIs, improving the one-stop CDMO service for APIs and formulations. After the integration is completed, Ruihua Zhongshan will quickly build production capacity for more dosage forms, which will become an important fulcrum of the company's pharmaceutical CDMO business in the future.
Risk factors: The integration situation is lower than expected, fixed growth and fund-raising project construction progress falls short of expectations, the increase in order volume falls short of expectations, increased competition has led to lower order prices, geopolitical risks, and the risk of large exchange rate fluctuations.
Profit forecasting, valuation and ratings: Judging from the number of project pipelines and customer commercialization project volume trends, the company's CDMO business is expected to continue to grow rapidly, and its share of revenue will continue to rise; the API business is expected to stabilize in the second half of the year. Overall, we expect the company's performance for the full year of 2023 to continue to grow. From a medium- to long-term perspective, the company's globally competitive process development and production capabilities (D and M) are expected to be realized in various fields — the implementation and volume of more CDMO post-clinical stages and commercialization projects, generic drug ingredient integration projects bringing new performance increases, etc. — will all drive the company to open up room for future business growth, and there is strong certainty that medium- to long-term performance will grow rapidly. Considering certain fluctuations in the API business, we adjusted the company's 2023-2025 EPS forecast to 1.37/1.74/2.19 yuan (the original forecast was 1.39/1.82/2.30 yuan). The current price corresponding to PE is 21x/16x/13x, respectively. Considering that the end of 2023 is approaching, reference to comparable companies (Yao Ming Kant, Pharmaceutical Technology, Haoyuan Pharmaceutical, based on Wind's unanimous expectations), the average PE in 2024 was 23 times, giving the company 23 times PE in 2024, corresponding to the target price of 39 yuan, maintaining the “buy” rating.