Revenue declined in Q3, and growth was achieved after deducting non-net profit. In the first three quarters of 2023, the company achieved operating income of 1,902 million yuan, a year-on-year increase of 0.46%; net profit of 583 million yuan, an increase of 12.74%; net profit after deduction of 576 million yuan, an increase of 25.66%; and net operating cash flow of 677 million yuan, an increase of 47.28% year-on-year. In the Q3 quarter of 2023, the company achieved operating income of 592 million yuan, a year-on-year decrease of 9.08%; net profit of 183 million yuan, a decrease of 1.52% over the previous year; and realized net profit after deduction of 182 million yuan, an increase of 16.15% over the previous year.

Revenue declined in a single quarter due to pressure on caffeine prices, and prices are expected to gradually stabilize in the future. The average export price of domestic caffeine reached a high point in April last year (unit price of 17.6 US dollars/kg), then gradually declined, falling to a unit price of 10.23 US dollars/kg in September this year. We believe that the decline in the price of caffeine is mainly related to the decline in the price of its upstream raw materials. The price of cyanoacetic acid, the main raw material, fell by about 46% this year, but there has been a gradual steady recovery since August this year. Considering the price trend of upstream raw materials, we believe that the export price of caffeine is also expected to stabilize at the same time, and the company's caffeine business revenue is expected to gradually resume growth.

Gathering has led to an increase in the market for third party raw materials for acarbose, and production capacity is expected to be gradually released. Bayer's acarbose formulation, which accounts for nearly half of the market share in 13 provinces collected in June 2022, did not win the bid. It is expected that Bayer's market share will continue to decline, and demand for other third-party raw materials is expected to continue to increase. This year, the company has increased its annual production capacity from 80 tons to 280 tons through green factory upgrade technology, making it the largest producer of acarbose in China. Future production capacity is expected to be gradually released.

Increased capital to Jushi Biotech to enter the innovative drug business. On September 11, 2023, the company issued an announcement to implement a cash capital increase for Jushi Biotech to obtain 51% of the shares of the target company, with a capital increase of 1,871 billion yuan.

On September 27, 2023, the bill was passed by a resolution of the Extraordinary General Meeting of Shareholders. Jushi Biotech is a wholly-owned subsidiary of Enbipu Pharmaceutical, focusing on innovative research and development of biopharmaceuticals such as antibody drugs, antibody-conjugated drugs (ADC), and mRNA vaccines. We believe the company is expected to enter the field of innovative drugs through the acquisition of Jushi Biotech, using the stable revenue and cash flow of the API business as the cornerstone to help develop innovative drugs.

Profit forecast: Based on the assumption that caffeine prices are gradually stabilizing and acabose production capacity is gradually released, we expect 2023-2025 revenue to reach 27.73, 31.22, and 3.482 billion yuan, up 5.6%, and 11.5% year on year; net profit is expected to reach 8.02, 9.33, and 1,079 billion yuan, up 10.4%, 16.3%, and 15.7%, corresponding to the closing price of November 14, 2023, the price-earnings ratio is 47.1 times, 40.5 times, and 35.0 times, respectively. For the first time, coverage was given an “increase in holdings” rating.

Risk warning: Fluctuations in raw material prices, intensification of competition in APIs, M&A progress falling short of expectations, etc.