Key points of investment

The CDMO and formulation sector will maintain a relatively rapid growth rate in 2023, and we continue to be optimistic that the higher gross margin CDMO and formulation business will drive the company's profitability.

Financial performance: The CDMO and pharmaceutical business grew rapidly in 2023. The company disclosed 2023 results: achieved revenue of 11.474 billion yuan (YOY 8.81%), net profit of 1,055 million yuan (YOY 6.69%), net profit of 1.06 billion yuan (YOY 22.73%), of which 2023Q4 achieved revenue of 2,974 million yuan (YOY -0.67%), net profit of 204 million yuan (YOY -38.54%), net profit of 119 million yuan (YOY 14.80%) ). The net cash flow from operating activities in 2023 was $1,031 million, down 22.23% from the same period last year. The main reason was the increase in the balance of operating payables and the year-on-year decrease.

By business segment: in 2023, API intermediates revenue was 7.987 billion yuan (YOY 3.23%), CDMO revenue was 2,005 billion yuan (YOY 27.10%), and pharmaceutical business revenue was 1,249 billion yuan (YOY 15.69%). CDMO has 736 ongoing projects (YOY 40%), including 285 commercialization projects (YOY 26%), including 200 human drug projects, 46 veterinary medicine projects, 39 other projects; 451 R&D projects (YOY 51%). The rapid growth in the number of CDMO projects will further support 2024.

Profitability: The increase in the 2023Q4 sales expense ratio is dragging down net interest rates. We expect the gross profit margin of 25.66% (YoY +1.76pct) for order expansion, CDMO gross margin of 42.29% (YoY +1.27pct), API intermediates 17.56% (+0.87% YoY), formulation gross margin of 53.14% (+1.01% YoY). The gross margin of all three business segments has increased.

2023Q4 gross profit margin 22.47% (YoY -0.27pct, month-on-month -4.73pct), net profit margin 6.86% (YoY -4.23pct, -2.97pct month-on-month). Looking at the cost ratio, the sales expense ratio increased by 3 pcts year on year (we expect to increase business development efforts), the financial expense ratio decreased by 1.2 pct year on year (interest income increased a lot), and the management expense ratio increased 0.12 pct year on year.

Outlook: I am optimistic that the CDMO and formulation business will continue to drive profitability. According to our calculation, the company's CDMO and formulation business revenue share will increase to 17.5% and 10.9% respectively in 2023. We expect that with the gradual increase in approved products in the formulation sector and the continuous delivery of CDMO projects, the company's formulation and CDMO business is expected to maintain faster growth compared to the API intermediates business. In the medium to long term, we are optimistic that higher gross margin CDMO and the formulation business will drive the company's profitability.

Profit forecasting and valuation

Considering that the absolute value of the company's profit side in 2023 was lower than our previous forecast, and considering that the API price trend is still unclear, we slightly lowered our profit forecast for 2024-2025. We expect the company's 2024-2026 EPS to be 1.02/1.20/1.47 yuan (the previous forecast was 1.20/1.39/- yuan, respectively), and the closing price on March 11, 2024 corresponds to 13 times PE in 2024 (11 times that of 2025). We are still optimistic about the continued improvement of the company's business structure, and look forward to the flexibility of the CDMO and formulation business to maintain a “buy” rating.

Risk warning

Raw material price fluctuation risk Competition risk, exchange rate fluctuation risk, order delivery fluctuation risk, policy risk.