2023 results are in line with expectations
The company's revenue in 2023 increased 2.5% year-on-year to RMB 40.34 billion (RMB, same below). Among them, revenue from the chemical (WuXi Chemical), testing (WuXi), biology (WuXi Biology), and cell and gene therapy CTDMO business (WuXi ATU) increased by 1.1%, 14.4%, 3.1%, and 0.1%, respectively. Due to the decline in revenue from COVID-related businesses from about 9 billion yuan in 2022 to 3 billion yuan, and the poor financing environment for pharmaceutical companies in 2023, some pharmaceutical companies cut R&D expenses, leading to a slowdown in the company's revenue growth. Despite this, the company increased its gross margin to 40.6% by improving operating efficiency from 36.9% in the same period last year. Shareholders' net profit increased 21.3% year over year to 10.69 billion yuan. Adjusted non-IFRS shareholders' net profit, which reflects core business profits, increased 15.5% year over year to 10.85 billion yuan. Both revenue and profit were in line with expectations.
Demand from downstream pharmaceutical companies will take some time to recover, and external uncertainties increase, and we expect the company's revenue in 2024-25 to fall short of earlier expectations. Based on: 1) The company's management said that due to reasons such as running-in after the new production capacity is completed, the delivery time for some orders has been extended. 2) Due to the poor operating environment of downstream pharmaceutical companies to reduce R&D expenses, the number of new molecules added to the main business chemical business in the fourth quarter was slightly lower than expected. 3) Judging from Artery Network data and information obtained by the company's management, the domestic healthcare industry's financing environment picked up moderately in the first two months of 2024, but it will still take time to improve significantly. The financing environment is critical for small and medium-sized pharmaceutical companies. For example, a poor business environment for small and medium-sized pharmaceutical companies will lead to a decline in demand for R&D outsourcing services carried out by CXO companies. Judging from the current situation, it will still take time for demand to rise markedly. 4) Although the “US Biological Bill Draft” will finally be reviewed by the House of Representatives and submitted to the President for approval, and it will take time for formal legislation, the Senate has now passed it, and the company recently left the famous US biotechnology organization (BIO). We believe this situation will inevitably have an impact on the US business. The US business accounts for 64.8% of the company's 2023 revenue. A slowdown in US business revenue will have an impact on the company. Based on the above situation, we lowered our 2024-25E revenue forecast by 17.4% and 24.3%, respectively. Shareholders' net profit forecasts were lowered by 15.3% and 24.4%. The adjusted non-IFRS shareholders' net profit forecast, which reflects core business profits, was reduced by 16.3% and 25.1%.
The target price was adjusted to HK$37.00, giving a “neutral” rating
In addition to the profit forecast adjustments, considering that the “Draft US Biological Act” is currently pending, if finally passed, it will have a long-term impact on the company's US business, we moderately raised the risk premium assumption in the DCF model and adjusted the sustainable growth rate assumption to 4.0% and the target price to HK$37.00 to maintain a “neutral” rating. We will continue to monitor the approval status of the Draft US Biological Act and the status of the company's new orders.
Risk warning: (1) Customers reduce R&D expenses; (2) Problems in the progress of the project may cause interruptions