Growth: Platforms, products, and production capacity continue to be upgraded. I am optimistic that the import substitution logic will accelerate the implementation of the company's revenue of 451 million yuan in Q1-3 in 2023, or YOY -4.05%. If the impact of magnetic bead products used for nucleic acid testing in the same period last year is excluded, revenue for the first three quarters of 2023 increased 8.55% year-on-year. Under the phased fluctuations in biomedical investment and financing and R&D boom in 2023, the company's core business, chromatographic fillers and chromatography media products, achieved revenue of 321 million yuan, YOY +9.12%, and the market share is still growing steadily. According to the company's investor exchange records (October 26, 2023), the domestic market share of the company's filler business in 2023 was about 10%, and the global market share was less than 1%. We expect the company's market share to increase or accelerate in 2024-2025, driving the company to achieve steady growth. The main support comes from:

① Expanding from focusing on core fillers to chromatographic platform layout. The company completed the acquisition and listing of Spectrum Instruments in 2022, and has completed the first 18.2% share transfer of Fuli Instruments as of December 2023. I am optimistic that the company will promote the experience of industrializing chromatographic fillers to the entire field of chromatographic platforms such as instruments, equipment and analytical consumables.

At the same time, the overall solution capability improvement brought about by the platform layout will also help the company introduce more downstream customers. According to the company's investor communication records (October 26, 2023), the company's fillers and consumables business targets 2 times the market growth rate, and protein chromatography instruments aim to increase the market share by 1 to 2 points each year.

② Major new products continue to be launched, opening up space for new downstream application scenarios. In October 2023, the company released monodisperse silicone chromatographic filler—UniSil? A new product in the Revo series. This product may break the import monopoly pattern in the silicone market for the separation and purification of GLP-1 polypeptide drugs. In the first three quarters of 2023, the company's silicone products achieved revenue of about 44 million yuan, an increase of about 16% over the previous year; among them, silicone products used in the purification of GLP-1 peptides achieved sales revenue of more than 5 million yuan, which was a particularly prominent increase. According to the company's 2023 mid-year report, several key new products such as the new soft rubber Protein A affinity chromatography medium will be released one after another. I am optimistic that with the company's high investment in R&D, the continuous launch of major products will continue to open up space for downstream application scenarios and help accelerate domestic substitution.

③ Capacity construction in Changshu and Zhejiang Nanowei is progressing in an orderly manner, and the upgrading of industrialization capacity helps release the funnel for undertaking projects. 2023H1 added about 630 new chromatographic fillers and chromatography media, including 130 antibodies, 142 vaccines, and 188 polypeptides/oligonucleotides; according to the R&D stage, 12 new clinical phase III projects and 3 commercialization projects were added. The rest were mainly pre-clinical research projects. As of September 2023, the company has an annual production capacity of about 60 tons of chromatographic fillers and chromatography media. As Changshu Nanowei reaches production of 40 tons of agarose microspheres and 10 tons of glucan microspheres at the end of 2023, the 125-ton vaccine purification microsphere project is put into operation by the end of 2023, and Zhejiang Nanowei's annual production of 600 tons of biochromatography media and 2 tons of chiral drug separation and purification project gradually begins to be put into construction, the company's industrialization capacity will accelerate and the gradual downward transformation of the project funnel.

④ Sales system adjustment to accelerate market expansion. In the first half of 2023, the company adjusted its sales system from two divisions, macromolecule and small molecule, to unified management by region. We are optimistic that the company will actively adjust its marketing strategy to adapt to the current biomedical development environment. Furthermore, the company acquired RILAS, an American chromatographic separation and purification service CRO company in 2022, and is optimistic that its positive impact on the company's expansion into the North American market will gradually be reflected.

Profitability: Continued scarcity, high incentives, high R&D investment to support sustainable growth and high gross margin: In an environment of sluggish downstream demand, the company's gross margin for the first three quarters of 2023 was 79.00%, which was basically the same year on year, reflecting the scarcity of its products. With continued high investment in R&D, I am optimistic that the company will continue to launch major products to build a high moat and support the continuation of high gross margins.

The trend of cost ratio optimization is clear: in the first three quarters of 2023, the company's net interest rate to mother was 8.64%, down about 36.44pct from the previous year. It was mainly affected by the combination of two equity incentive tools, combined with Spectrum instruments, and a significant increase in R&D investment. According to the company announcement, we expect the company's total annual share payment expenses for 2023-2025 to be 133/0.90/51 million yuan, respectively. However, after excluding this portion of the cost, we expect: in terms of management expenses, the integration of Spectrum instruments or some continuous impact, but at the same time, the scale effect is expected to remain stable; in terms of sales expenses, after reforming the company's sales system or continuing an active sales strategy, the sales cost rate may remain stable; in terms of R&D expenses, the number of R&D personnel in the first half of 2023 will increase by 15%, while the average salary will increase by 45%, mainly related to introducing a number of high-end technical talents to enhance the ability to innovate in 2022, along with the company's full platform for chromatographic filler instruments and consumables Layout. We expect that the company may continue to maintain a high level of R&D investment to achieve major demand product layout planning and accelerated expansion of application scenarios in multiple fields.

Profit forecasting and valuation

We believe that as a leading domestic chromatographic filler, the company has a certain first-mover advantage in terms of product performance, customers, project cooperation cases, and project funnel structure. We continue to be optimistic about the sustainability of the company's performance growth driven by domestic substitution. Since the phased fluctuations in the domestic biomedical R&D boom since 2023 have exceeded our previous expectations, we lowered our forecast to 2023-2025 to the company's operating income of 7.04, 8.69, and 1,078 billion yuan; we forecast the company's net profit to the mother in 2023-2025 will be 0.54, 1.23, and 206 million yuan, with year-on-year growth rates of -80.45%, 128.09%, and 68.07% respectively, corresponding to the closing price on December 26, 2023 In 2023-2025, PE was 195, 85, and 51 times, respectively, maintaining the “gain” rating.

Risk warning

Risk of new customer expansion falling short of expectations; risk of performance fluctuations due to cyclical procurement from existing customers; risk of increased market competition; risk of new product development or progress falling short of expectations; risk of overseas business expansion