Core views

On December 28, the company granted stock options and restricted shares to incentive recipients for the first time, with a total of 24.721 million shares/10,000 shares. This incentive plan helps to deeply bind the company's management and core technical (business) personnel to the company's interests and ensure the long-term healthy development of the company. Amortization expenses have been drastically reduced compared to when the draft plan was announced, and the impact on the future profit side of the company is limited. On the same day, the company's diploid vaccine was issued in batches. The recruitment and sales promotion work continued to advance, product competitors were limited, and the competitive pattern was good. It is expected that the future will usher in rapid expansion, providing the company with new performance growth points.

occurrences

The company first granted stock options and restricted shares to incentive recipients. On December 11, the company issued the “2023 Stock Options and Restricted Stock Incentive Plan (Draft)”. On December 28, the company issued the “Notice Concerning the First Grant of Stock Options and Restricted Shares to Incentive Recipients”.

The company's human diploid cells have obtained batch issuance certificates

On December 28, the company announced that the freeze-dried human rabies vaccine (human diploid cells) produced by its subsidiary Minhai Biology obtained the “Biological Product Batch Issuance Certificate” issued by the State Drug Administration today.

Brief review

Stock options and restricted shares were granted for the first time to ensure the long-term healthy development of the company

The status of awarding stock options and restricted stocks this time is as follows: 1) First-time awardees: 458 people were granted stock options, and 462 people were granted restricted shares, including directors, senior management, middle management, and core technology (business) executives. 2) Number of initial grants:

First grant of 8.084 million share options; grant of 166.37 million shares of restricted stock for the first time. 3) Exercise price/grant price: The exercise price for stock options is 25.39 yuan/share, and the grant price for restricted stock is 15.87 yuan/share. 4) Fee amortization situation: Using the grant date of December 27, 2023 as the calculation reference date, the total amortization fee for stock options granted for the first time was $26.11,900, and the total amortization fee for granting restricted shares was $175.2569 million. Based on this calculation, the grant of stock options in 2024-2027 will require amortization of 1207.15/841.21/482.03/7080 million yuan, respectively, and 9064.99/5393.95/2685.06/381.69 million yuan for the grant of restricted shares, respectively.

The incentive plan guarantees the long-term healthy development of the company, and amortization expenses are narrower than the draft. This incentive plan helps stimulate the enthusiasm and creativity of company management and core technical (business) personnel, achieve deep binding with the company's interests, and ensure the long-term healthy development of the company. After granting stock options and restricted shares, the total amortization expenses were $210 million, and the amount to be amortized in 2024-2027 was $1.03/0.62/0.32 billion yuan, which is significantly lower than the estimated amount when the draft plan was announced (the original estimated amortization expenses totaled 333 million yuan, and the 2024-2027 amortization expenses were amortized separately), which is expected to have limited impact on the company's profit side in the future.

The performance assessment goals are clear, demonstrating the company's confidence in long-term development. The assessment year for the company's current incentive plan is 2024 to 2026. Based on net profit deducted from non-return to mother in 2023, the fixed growth rate of non-net profit deducted in each assessment year compared to non-net profit deducted in 2023 was assessed, and the company-level exercise ratio for each year was determined based on how the assessment indicators for each assessment year were achieved. Assessment target A (100% of the company's exercise of power) is the 2024-2026 net profit increase of 25%, 50%, and 70%, respectively, compared to 2023 (25%, 20%, and 13% year-on-year increase, respectively). In this incentive plan assessment, net profit not returned to mother was selected as an assessment index, which can reflect the company's profitability as a whole, effectively reflect the company's final operating results, and demonstrate confidence in the company's long-term development.

Human Diploid Mad Seedlings have been issued in batches, and we look forward to rapid release in the future

The company's self-developed human diploid vaccine was approved for marketing in September 2023. Currently, it is actively carrying out vaccine promotion and recruitment. Up to now, the company's human diploid vaccine has been approved for admission in Shandong, Henan, Heilongjiang, Guizhou, Jilin and other provinces. The company's human diploid cells use two immunization procedures, the “5-dose method” and the “2-1-1” (four-needle method). Clinical results showed that both immunization procedures had good safety, immunogenicity and immunity persistence after full vaccination. Currently, Kanghua Biotech is the only company that has marketed the human diploid vaccine in China. In the research pipeline, only products from Chengdu Institute, Chengda Biotech, and Zhifeilong Koma are in phase III clinical trials. Potential competitors are limited, and the competitive pattern is good. As the company's products are issued in batches and the procurement and sales promotion work continues to advance, the company's diploid vaccine is expected to rapidly expand, providing the company with new performance growth points.

Profit Forecasts and Investment Ratings

This time, the company granted stock options and restricted shares to incentive recipients for the first time, which helps to deeply bind the company's management and core technical (business) personnel to the company's interests and ensure the long-term healthy development of the company. The company has a rich product layout, multiple R&D pipelines are progressing smoothly, and international cooperation continues to advance. It is expected that in the future, PCV13 will rely on its price and product quality advantages to achieve continuous sales growth and continue to drive the company's performance growth. Diploid Mad has been issued in batches, and it is expected to bring additional performance to the company in the future next year. The company's international business has progressed significantly. PCV13 was approved in Indonesia, and PCV13 authorized agency and technology transfer agreements were signed with Egyptian vaccine companies. The international market is expected to continue to expand in the future.

We expect the company to achieve revenue of 3,582 billion yuan, 4.408 billion yuan and 5.389 billion yuan respectively from 2023 to 2025, with year-on-year increases of 13.5%, 23.1% and 22.3%, respectively. Net profit attributable to mother was $929 million, $1,010 million, and $1,267 million, respectively, turning a loss into profit in '23, increasing 8.7% and 25.5% year-on-year, respectively. Equivalent EPS was 0.83 yuan/share, 0.90 yuan/share, and 1.13 yuan/share, respectively. Corresponding PE was 31.7X, 29.2X, and 23.3X, respectively, maintaining the buying rating.

Risk analysis

1. The speed of release and approval falls short of expectations: The company continued to advance admission after the launch of PCV13, and the admission process slowed down in '22. If subsequent admission and release progress falls short of expectations, it will affect the company's expected performance and valuation. The company's Diploid Mad Seedling is expected to be approved for listing in 23. Failure to obtain approval according to the expected schedule will affect the company's expected future performance.

2. Risk of product price fluctuations: Prices of listed products may fluctuate. If the price drops significantly, it will affect the company's revenue and profit expectations, which in turn affects valuation.

3. Product safety risks: Vaccines have certain safety risks due to their special biological characteristics. If a vaccine safety incident occurs, it will not only adversely affect the operation and production of the enterprise itself, but may also cause fluctuations in the vaccine industry.