The company predicts a 36-53% year-on-year increase in net profit
The company's 2023 performance forecast: In 2023, net profit to mother was 1,54-1.74 billion yuan, up 36-53% year on year (median value of 44%), after deducting non-net profit of 12.3-1.38 billion yuan, up 21-36% year on year (median value of 28%). Exceeded our expectations, mainly due to increased company efficiency and increased profit margins.
Key points of interest
Profit margins have increased markedly. According to the performance forecast, the company expects net profit to be 0.28-0.48 billion yuan in 2023Q4, with a year-on-year growth range of -5.4% -61.8% (median value of 28.2%), after deducting non-net profit of 0.25-40 million yuan, or +8.7-74.3% (median value of 41.5%). With 2023H1, the company's clinical trial operation service revenue was 181 million yuan, +7.55% year over year, gross profit margin increased 1.55ppt year over year, clinical trial site management service revenue was 88 million yuan, +17.46% year over year, gross profit margin 29.62%, up 7.44ppt year on year. We expect the second half of 2023 to continue the trend of increasing gross margin in the first half of the year.
Orders are growing rapidly, and we are optimistic that the market share of high-quality clinical CRO will increase. With 2023H1, the company achieved an additional contract amount of 649 million yuan, +69.78% over the same period last year. In the long run, policies encourage enterprises to avoid burgeoning targets and indications, place higher demands on R&D capabilities, and further promote the upgrading of structural demand in the innovative drug research and development industry chain. We believe that in the context of traditional pharmaceutical companies' lack of R&D functions, high-quality clinical CRO undertakes the outsourcing function of the supply system and the function of guiding and consulting for the transformation of traditional pharmaceutical companies. The scarcity of leading clinical CRO production capacity is prominent, and the strong are always strong.
The equity incentive draft was released, demonstrating the company's confidence in long-term development. In August 2023, the company released an equity incentive plan (draft). The incentive targets include 251 senior management, middle management, and core technical/business personnel. A total of 2.4 million restricted shares were granted, accounting for 2.5% of the company's share capital at the time of announcement. The assessment target is: 2023-2025 net profit growth rate of not less than 20%/44%/72.8% based on 2022 net profit.
Profit forecasting and valuation
Due to improved company efficiency and higher profit margins than expected, we raised 2023/2024 net profit by 10.8%/15.5% to 162 million yuan/215 million yuan, and introduced net profit of 264 million yuan in 2025.
The current stock price corresponds to the 2024/2025 22.1/18.0 price-earnings ratio. Due to recent systemic adjustments in the pharmaceutical sector, we have maintained an outperforming industry rating and target price of 83.40 yuan, corresponding to 37.3 times 2024 and 30.3 times 2025 price-earnings ratio, with 68.5% upside compared to the current stock price.
risks
Policy changes, risk of litigation, increased competition, rising labor costs, and fluctuations in investment in research and development of new drugs.