Incident: The company released its 2023 annual results report. The company achieved operating income of 1,259 million yuan in 2023, a year-on-year decrease of -4.32%, and realized net profit of -190 million yuan, compared to -90 million yuan in the same period last year; achieved operating income of 29 million yuan in a single quarter, down 22% year on year, and realized net profit to mother of -135 million yuan, compared to -34 million in the same period last year. 2023 results fell short of expectations.

The decline in performance in 2023 was mainly due to the impact of stock product collection and the costing of COVID-19 small molecule R&D expenses. The company's erythropotropin and human granulocyte-stimulating factor dropped significantly in 2022 in 11 regions including Guangdong Province. Collection began in 2023. Although sales continued to grow, price cuts led to a decline in sales. At the same time, by strengthening lean management of the entire business process, sales expenses and production costs decreased compared to the same period last year, so the impact of collection on the company's profit was less than the impact on revenue. The net profit due to this announcement decreased by 0.8-105 million yuan compared to the January 29 performance forecast. The main reason is that the company costed all development expenses for the COVID-19 small molecule SHEN26 capsule project and handled the COVID-19 project at the financial level in advance, which is conducive to reducing the negative impact of the amortization of COVID-19 project R&D expenses on future company performance. Furthermore, according to the company announcement, the company has applied to the Shenzhen Municipal Government in accordance with the relevant innovative drug subsidy policy. It is expected that it will receive no more than 65 million yuan in government subsidies in 2024. The specific amount is based on approval and actual results from relevant departments The amount received shall prevail.

Steadily advancing the “overseas commercialization” strategy, the harvest period will begin in 2024. Going overseas to emerging markets is one of the company's important strategies at present. According to the company's announcement, it has now introduced 11 products, and the company plans to introduce at least 20 products by 2025; the overseas listing registration, GMP inspection and certification of the introduced products is progressing smoothly. According to the company announcement, in January 2024, the Brazilian Drug Administration completed the GMP audit of infliximab, and the European Union completed the GMP audit of white purple. The company expects that products such as albumin paclitaxel, infliximab, bevacizumab, and adamumab will follow in 2024 Overseas sales began this year. Based on confidence in the company's overseas business, the actual controller and chairman proposed to repurchase the company's shares. The total repurchase capital was 30-60 million. The repurchase price was not higher than 150% of the average price of the company's shares in the 30 trading days before the board of directors reviewed and approved the share repurchase plan resolution.

I am optimistic about the company's overseas business and give it a “buy” rating. According to the 2023 Earnings Report, we adjusted our 2023 profit forecast. Net profit to the mother is expected to be -190 million in 2023, compared to the previous forecast of -70 million. The negative impact of domestic procurement of stock varieties has been reduced, and emerging markets have gone overseas to create a second growth curve, keeping the 2024-2025 net profit forecast unchanged at $08 million and $108 million, respectively. Since the company has yet to achieve stable profits, the FCFF absolute valuation method was used to calculate that the value of Kexon Pharmaceuticals is 21.62 yuan per share. There is still more than 20% room to rise from the current (February 23) stock price, maintaining a “buy” rating.

Risk warning: risk of delays in overseas review progress, risk of sales volume falling short of expectations, risk of exchange rate fluctuations.