The company announced a year-on-year decline of 83-88% in net profit in 2023

The company released a performance forecast: In 2023, revenue was 35.2-3 870 million yuan, a year-on-year decrease of 45-50%, net profit of 24-340 million yuan, a year-on-year decrease of 83-88%, after deducting non-net profit of 29-39 million yuan, a year-on-year decrease of 80-86%, lower than our expectations. Fluctuations in performance are mainly due to the impact of large order bases, poor capacity utilization, and low profit margins due to poor capacity utilization and new businesses still in the investment period.

Key points of interest

The main business grew steadily in 2023, and there is still room for improvement in capacity utilization. In 2023, we expect the confirmed amount of large orders to be 1.03 billion yuan, revenue after deducting large orders of 15.7-1.64 billion yuan, an increase of 4.8-19.6% over the previous year, and steady growth in our main business. On a quarterly basis, in the fourth quarter of 2023, revenue was 48-83 million yuan, down 54.2-73.5% year on year, and net loss to mother was 1.1 to 210 million yuan, down 125.9-149.5% year on year. Profit margins are under pressure, mainly due to: 1) low capacity utilization after production delivery of large orders; 2) the new R&D center and production base have just started operation and are still in the investment period; 3) the labor costs and expenses of the new business have increased.

The Jiangxi production base passed the FDA on-site inspection1. On November 20, 2023, the company's Jiangxi production base successfully passed the US Food and Drug Administration (FDA) on-site inspection, indicating that the production plant, equipment/facilities and quality management system of the company's Jiangxi production base meet the GMP quality standards of US pharmaceuticals. We believe it is beneficial for the company to continue to provide end-to-end CDMO services to customers around the world.

It was announced that a strategic cooperation has been reached with Yingli Pharmaceuticals2. On November 23, 2023, the company and Shanghai Yingli Pharmaceutical jointly announced that they have reached a strategic partnership. The two sides will develop related business cooperation on raw materials (including pharmaceutical intermediates) and pharmaceutical formulation products for small-molecule innovative drugs. The new anti-tumor drug linflixide tablets developed by Yingli Pharmaceutical are used to treat recurrent or refractory follicular lymphoma. It has obtained CDE breakthrough treatment certification. It is the second pharmaceutical company in the country and the first pharmaceutical company in Shanghai to receive the “breakthrough treatment variety” drug certification.

Profit forecasting and valuation

Considering the base effect caused by fluctuations in the pace of delivery of large orders, the company's low capacity utilization rate, and the new production capacity and new business are still in the investment stage, we lowered our 2023/2024 net profit forecast by 66.7%/64.4% to $292/318 million, while introducing a net profit forecast of 402 million yuan for 2025.

Considering that fluctuations in the pace of large order delivery affect the apparent growth rate, we only lowered the target price by 27.3% to 24 yuan, corresponding to 2024/2025 P/E of 41.4x/32.4x (current closing price corresponds to 34.4x/27.2x), with an upward margin of 19.8%, maintaining an outperforming industry rating.

risks

Major customers account for a high share of revenue; fierce competition; fluctuating orders; rising raw material prices; falling short of expectations; exchange rate risk; geopolitical risk.