Key points of investment
In 2023, excluding large orders, the main business maintained high growth. The number of small-molecule CDMO commercialization projects increased year-on-year, and the YOY trend in front-end revenue was stable. We are optimistic about the sustainability of the company's performance growth driven by the company's leading and unique CRDMO/CTDMO business model.
Performance: Excluding large orders in 2023, high revenue growth in the main business
The company disclosed its 2023 annual report results: in 2023, it achieved revenue of 40.341 billion yuan (YOY 2.51%), excluding large order revenue of YOY 25.6%, net profit attributable to mother of 9.607 billion yuan (YOY 9.00%), deducting non-net profit of 9.748 billion yuan (YOY 16.81%), and adjusted non-IFRS net profit of 10.86 billion yuan (YOY 15.5%). 2023Q4 achieved revenue of 10.799 billion yuan (YOY -1.47%), net profit of 1.53 billion yuan (YOY 6.58%), deducted non-net profit of 2,038 billion yuan (YOY 0.50%), and adjusted non-IFRS net profit of 2,693 billion yuan (YOY 2.52%). The net cash flow from operating activities in 2023 was $13.387 billion, an increase of 26.10% over the same period in 2022, showing good operating quality.
Revenue split: Small molecule CDMO commercialization projects increased year-on-year, front-end revenue YOY trend stabilized chemical business: commercialization projects increased month-on-month, and high growth in TIDES orders increased certainty over 24 years. In 2022, the chemical business revenue was 29.17 billion (YOY 1.12%, excluding large order revenue YOY 36.1%), of which small-molecule CDMO revenue was 21.62 billion (YOY -0.1%, excluding large order revenue YOY 55%), and the split yielded about 5% YOY of drug discovery revenue. According to 2023Q4, drug discovery revenue is about 7%, and small-molecule CDMO excludes large order revenue of about 71% YOY. The company added a total of 1,255 molecules in 2023. By the end of 2023, the total number of D&M molecular pipelines reached 3,201, including 61 commercialized projects and 66 clinical phase III projects. Among them, commercialization projects increased by 11 year over year (8 more compared to 2022). TIDES business revenue reached RMB 3.41 billion in 2023, a strong year-on-year increase of 64.4%. By the end of 2023, TIDES's on-hand orders increased significantly by 226% year over year.
Testing business: Steady growth. Revenue of 6.54 billion yuan (YOY 14.4%) was achieved in 2023, of which 4.78 billion yuan (YOY 15.3%, safety assessment revenue YOY 27.3%) and clinical CRO and SMO business revenue was 1.76 billion yuan (YOY 11.8%, of which YOY 26.1% of SMO business). Looking at the breakdown: 2023Q4 laboratory analysis and testing service revenue was 1.24 billion (YOY 12.54%), and clinical CRO and SMO revenue was 4.4 billion (YOY 1.07%).
Biology business: Achieved revenue of 2.55 billion yuan (YOY 3.1%) in 2023. Revenue related to new molecular types in the biology business segment increased 26% year over year, contributing 27.5% of biology business revenue. In the fourth quarter of 2023, the Suzhou Guoxiang Intelligent Research Platform was completed to strengthen the layout of new capabilities in vitro biology and pharmacology in vivo. It was calculated that 2023Q4 biological revenue was 658 million (YOY -5.5%), and the absolute value of 2023Q2-Q4 quarterly revenue was relatively stable.
ATU: The results are expected to enter a period of accelerated cashout. It achieved revenue of 1.31 billion yuan (YOY 0.1%) in 2023. As of the end of 2023, it provided services for a total of 64 projects, including 1 commercialization project and 5 clinical phase III projects (1 project is in the marketing application review stage and 2 projects are in the marketing application preparation stage).
In June 2023, the company signed an LVV production order for commercial CAR-T products. Process verification is ongoing, and production is expected to begin in the first half of 2024. In addition, the company is preparing a BLA declaration for the production of a major commercial CAR-T product. It is expected that process verification will be completed in the first half of 2024 and the FDA will be declared in the second half of 2024. It will support steady growth in 2024-2025.
DDSU: The split gradually enters the cashout period. Achieved revenue of RMB 73 billion, a year-on-year decrease of 25.1% due to active iterative business upgrades. In 2023, 3 new drugs developed by the company for customers have been approved for marketing. 2 are innovative oral antiviral drugs and 1 is an oncology drug. The company continues to receive revenue share from the sales of new drugs already on the market. Currently, the company has 2 other drugs in the marketing application stage. The DDSU split model is also expected to enter the cashout phase.
Outlook: It is expected to maintain high profitability in 2024, and is optimistic about performance resilience under external disturbances 2024 revenue guidance: The company's annual report revealed that “despite the uncertainty of the external environment, the company expects revenue to reach RMB 383-40.5 billion in 2024, and will maintain positive growth after excluding specific commercial production projects (estimated growth rate of 2.7-8.6%).”
Profit margin guidance: The company's official website performance ppt revealed that “2024 is expected to maintain an adjusted non-IFRS net interest rate equivalent to last year”. In 2023, the company's adjusted non-IFRS net interest rate reached 26.92% (up 3.04pct year on year), and the 2023Q4 adjusted non-IFRS net interest rate was 24.94% (up 0.97pct year on year). Assuming that the adjusted net interest rate level remains at 26.92% in 2024, it is calculated that the adjusted non-IFRS net profit in 2024 may be 103-10.9 billion (YOY -5% ~ 0.4%). The higher adjusted net interest rate level also shows the company's profit advantage under improved efficiency and large-scale effects, and it continues to be optimistic that profitability will remain high. We are optimistic about the company's integrated CRDMO/CTDMO business model. Even under external disturbances, we are still optimistic about the company's performance growth and resilience.
Profit forecasting and valuation
Based on the global biomedical investment and financing boom, external disturbances to the company's operating uncertainty, and changes in the company's 2024 performance guidelines, we lowered our revenue and profit side for 2024-2025. We expect the company's EPS to be 3.43, 3.57, and 4.01 yuan in 2024-2026 (the previous forecast was 3.90 and 4.55 yuan for 2024-2025 EPS), and the closing price on March 25, 2024 corresponds to 14 times the 2024 PE, which is in a relatively undervalued position and maintains a “buy” rating.
Risk warning
Risk of declining global investment in innovative drug R&D; risk of business decline due to poor international expansion; risk of competition; risk of exchange; risk of uncertainty caused by fluctuations in fair value.