Net profit is forecast to drop 61.1-71.1% year-on-year in 2023
The company announced its 2023 performance forecast: In 2023, revenue was 22.68 to 2,495 billion yuan, up 0.0-10.0% year on year, net profit to mother was 311-418 million yuan, down 61.1-71.1% year on year, after deducting non-net profit of 286-388 million yuan, down 62-72% year on year. It fell short of our expectations, mainly due to changes in the fair value of biological assets and the impact of falling order prices on profit margins.
Key points of interest
Revenue from the main business grew steadily. The company predicts that laboratory service revenue will remain stable and grow slightly in 2023. Net profit will be 443-501 million yuan, a year-on-year decrease of 13.1-23.1%. The pressure on profitability is mainly due to weakening market demand due to weakening market demand from investment and financing in the pharmaceutical industry. Increased competition led to lower order prices and lower gross margin. Fluctuations in the fair value of biological assets affect profit margins. The net loss from changes in the fair value of the company's biological assets in 2023 was 2.52 to 283 million yuan, and net profit in 2022 was 308 million yuan. The decline was mainly due to falling biological asset market prices.
Continue to promote production capacity construction. The layout plan for Suzhou Zhaoyan Phase II's 20,000 square meter facility has been completed. Of these, the 12,000-square-meter facility has been designed and put into use in the second half of 2023; Suzhou has begun construction projects for 22,000 square meters of supporting facilities, which support various operational requirements, and the company expects to complete and put into use in 2024. The construction of the Guangzhou Zhaoyan Security Assessment Base is currently progressing in an orderly manner.
The construction project for the Zhaoyan Yichuang non-GLP laboratory, a wholly-owned subsidiary focusing on the screening of new drugs, has basically been completed, has entered the operation and commissioning stage, and will soon be officially put into use.
A breakthrough has been achieved in clinical testing. In August 2023, Zhaoyan's clinical tests passed a number of American Association of Pathologists (CAP) proficiency tests (proficiency tests), covering CYP2C19, CYP2C9, and VKORC1 gene polymorphism tests. We believe that the passage of multiple CAP interlaboratory quality assessments marks the gradual internationalization of “Zhaoyan Clinical Testing”, and also marks the expansion of “Zhaoyan Clinical Testing” into a more segmented field of genetic testing.
Profit forecasting and valuation
Considering changes in the fair value of biological assets, weakening domestic demand due to investment and financing in the pharmaceutical industry, and increased competition, we lowered 2023/2024 net profit by 45.2%/54.2% to 374 million yuan/401 million yuan, and introduced net profit of 501 million yuan in 2025. A/H shares maintained an outperforming industry rating. Considering the steady growth in main business revenue, we only lowered the target price of A shares by 32.6% to 21.50 yuan, corresponding to 40.6x/32.1x 2024/2025 P/E (current closing price is 34.0x/27.2x), corresponding to 19.8% upward space, and only lowered the target price of H shares 36.5% to 12.00 HKD corresponding 19.5x/15.4x2024/2025 P/E (current closing price is 16.5x/12.9x), corresponding to 18.6% upward space .
risks
Talent loss risk, market competition risk, raw material supply risk, new business development risk.