Core views
On March 18, the company released its 2023 annual report, and the performance was in line with expectations. Excluding specific commercialization projects, the company's revenue side increased rapidly over the same period last year. In 2023, the integrated service platform promoted steady growth in all sectors of business, and continued improvement in operating efficiency. Despite the uncertainty of the external environment in 2024, we expect that the company's integrated service model will still give full play to its unique advantages. Regular business will remain stable, operating efficiency and asset utilization will continue to improve, and we are optimistic about the company's long-term development prospects.
occurrences
The company released its 2023 annual report, and the performance was in line with expectations
On March 18, the company released its 2023 annual report, achieving: 1) operating income of 40.341 billion yuan, up 2.51% year on year; 2) net profit of 9.607 billion yuan, up 9.00% year on year; 3) net profit without return to mother of 9.748 billion yuan, up 16.81% year on year; 4) adjusted non-IFRS net profit of 10.855 billion yuan, up 15.49% year on year; 5) basic earnings per share of 3.27 yuan. The performance was in line with expectations.
The company's 2023 distribution plan: It is proposed to distribute a cash dividend of 9.83 yuan (tax included) to all shareholders for every 10 shares, for a total cash dividend of 2,882 billion yuan (tax included).
Brief review
Excluding specific project revenue, which maintained rapid growth, operating efficiency continued to improve. In the fourth quarter of 2023, the company's revenue was 10.799 billion yuan, down 1.47% year on year; net profit to mother was 1,530 billion yuan, up 6.58% year on year; net profit after deducting non-return to mother was 2,038 billion yuan, up 0.50% year on year; and adjusted non-IFRS net profit to mother was 2,688 billion yuan, up 2.32% year on year. The growth rate of performance has slowed, mainly due to the high performance base due to COVID-19 commercialization projects in the same period last year. In 2023, the company continued to drive business growth with the world's leading “integrated, end-to-end” CRDMO and CTDMO service platforms. Excluding COVID-19 commercialization projects in 2023, the company's revenue side increased 25.6% year-on-year and maintained rapid growth. The adjusted non-IFRS net interest rate for the whole year was 26.92%, an increase of 3.04pct over the same period last year, reflecting the continued improvement in the company's operating efficiency.
Ongoing orders have maintained rapid growth, and customer stickiness and demand from large pharmaceutical companies have remained strong. By the end of 2023, excluding specific commercial production projects, the company's on-hand orders increased 18% year over year, maintaining a relatively rapid growth rate. In 2023, the top 20 global pharmaceutical companies contributed 16.11 billion yuan in revenue, a year-on-year increase of 44% after excluding specific commercial production projects, reflecting the strong demand for company services by large pharmaceutical companies. In 2023, the company's original customers contributed 39.63 billion yuan in revenue, a year-on-year increase of 30% after excluding specific commercial production projects, showing strong customer stickiness. Customers using multi-business unit services contributed 37.47 billion yuan in revenue, an increase of 27% year-on-year after excluding specific commercial production projects, reflecting the service advantages of the company's integrated R&D service platform.
Revenue in the US region has increased significantly, and human efficiency continues to improve. The company has 32 operating bases and branches around the world. In 2023, US customers contributed 26.13 billion yuan in revenue, up 42% year on year and accounting for 65% of revenue after excluding specific commercial production projects, reflecting a strong recovery in demand for US pharmaceutical R&D services; European customers contributed 4.70 billion yuan, up 12% year on year; China contributed 7.37 billion yuan, up 1% year on year, accounting for 18%; customer revenue from other regions contributed 2.14 billion yuan, up 8% year on year, accounting for 5% year on year. The company has a total of 41,116 employees, generating revenue per capita of 981,000 yuan in 2023, an increase of 10.6% over the previous year, reflecting the continuous improvement of the company's human efficiency.
Business in all sectors is growing steadily, and profitability continues to improve
Chemical business (WuXi Chemistry): Commercialization projects excluding COVID-19 have maintained strong growth, and the production capacity of the new molecule business continues to increase. In 2023, the company's chemical business revenue was 29.17 billion yuan, up 1.1% year on year. Excluding COVID-19, commercialization projects increased 36.1% year on year, maintaining strong growth. The adjusted non-IFRS gross margin was 45.1%, an increase of 4.0 pts over the previous year. In addition to exchange rate effects, it was mainly due to continued improvement in business efficiency.
In terms of small molecule drug discovery (R) services, the company's revenue in 2023 was about 7.55 billion yuan, an increase of about 4.7% over the previous year. The drug discovery business continues to be a downstream drain. Over the past 12 months, more than 420,000 new compounds were successfully synthesized and delivered, up 6% year over year; new customers increased 12% year over year. In terms of process development and production (D&M) services, the company's revenue in 2023 was 21.62 billion yuan, a year-on-year decrease of 0.1%, and a strong year-on-year increase of 55.1% after excluding COVID-19 commercial production projects. By the end of 2023, the total number of the company's D&M molecular pipelines reached 3,201, including 61 commercialization projects, 66 clinical phase III projects, 326 clinical phase II projects, and 2,748 clinical phase I and pre-clinical projects, with a total of 20 additional clinical phase III and commercialization projects compared to the beginning of the year. In January 2024, part of Taixing's API production base was officially put into operation, enabling the business to continue to grow.
In terms of new molecular services, the company's TIDES business (mainly oligonucleotides and peptides) continued to expand, contributing 3.41 billion yuan in revenue in 2023, an increase of 64.4% over the previous year. By the end of 2023, TIDES's on-hand orders increased 226% year over year. TIDES D&M served 140 customers, up 36% year on year; the number of service members was 267, up 41% year on year. The company completed the production capacity expansion project at the Changzhou and Taixing bases. The new production capacity was put into use in January 2024, and the volume of the peptide solid phase synthesis reactor was increased to 32,000 L.
Testing business (WuXi Testing): The sector business is developing steadily, and the security assessment and SMO business drive performance growth. In 2023, the company's testing business achieved revenue of 6.515 billion yuan, an increase of 14.4% over the previous year. The adjusted non-IFRS gross profit margin was 38.6%, an increase of 1.9 pts over the previous year. In addition to exchange rate effects, it was mainly due to continued improvements in efficiency.
In terms of laboratory analysis and testing services, the company achieved revenue of 4.78 billion yuan in 2023, an increase of 15.3% over the previous year. Among them, revenue from the drug safety evaluation business increased 27.3% year on year, continuing to maintain the leading position in the Asia-Pacific industry. Production capacity of 55,000m2 of new facilities in Qidong and Suzhou was released in an orderly manner, while new molecular business-related capabilities were continuously improved. In terms of clinical CRO and SMO services, the company achieved revenue of 1.76 billion yuan in 2023, an increase of 11.8% over the previous year.
Among them, SMO business revenue increased 26.1% year-on-year, maintaining a leading domestic position, and enabled 54 products to be approved for listing throughout the year. In 2023, the clinical CRO business helped customers obtain 21 clinical application approvals and submit 5 marketing applications.
Biology Business (WuXi Biology): Revenue remained steady throughout the year, and businesses related to new molecule types grew rapidly year over year. The biology business achieved revenue of 2.55 billion yuan in 2023, an increase of 3.1% over the previous year. The full-year adjusted non-IFRS gross margin was 42.4%, up 1.5 pts year over year, mainly benefiting from exchange rate changes. The company has about 3,000 experienced scientists, distributed in 9 parks in China, the US and Germany, and is capable of covering all stages of new drug discovery and major disease fields. The company is focusing on building new biological capabilities related to new molecular types. The new nucleic acid molecule platform has served more than 200 customers, and has successfully delivered more than 900 projects since 2021. Revenue related to new molecular types increased 26% year-on-year in 2023, accounting for 27.5% of the revenue of the biology business segment, becoming an important driving force for the growth of the biology sector.
High-end therapeutic CTDMO business (WuXi ATU): Continued construction of the CTDMO platform to serve the first commercialized project. In 2023, the company's ATU business revenue was 1.31 billion yuan, up 0.1% year on year; adjusted non-IFRS gross margin was -9.6%, down 3.7 pts year on year, mainly due to the decline in revenue from high-margin projects, compounded by insufficient capacity utilization. By the end of 2023, the company provided process development, testing and production services for 64 projects, including 49 pre-clinical and clinical phase I projects, 9 clinical phase II projects, 5 clinical phase III projects (1 project is in the marketing application review stage, 2 projects are in the marketing application preparation stage), and 1 commercialization project. The company helped the customer complete the BLA for the world's first innovative TIL project, and the US Philadelphia facility successfully passed the FDA pre-approval inspection for drug marketing. Further commercialization projects will continue to advance, which will significantly drive the company's ATU business revenue growth and service capacity improvement.
Domestic New Drug Research and Development Service Department (WuXi DDSU): Achieved a sales revenue share breakthrough from 0 to 1, and the number of service projects continued to grow. In 2023, the company's DDSU business revenue was 730 million yuan, a year-on-year decrease of 25.1%, achieving a sales revenue share breakthrough from 0 to 1. The adjusted non-IFRS gross profit margin was 36.5%, up 6.3 pts year over year, mainly due to a favorable project portfolio. Three new drugs developed by the company for customers in 2023 have been approved for marketing, and will continue to receive sales revenue shares; two other drugs are in the marketing application stage. By the end of 2023, the company had completed IND applications for 190 projects and obtained CTAs for 169 projects. Of these, 3 projects have been approved for listing, 2 projects are in the listing application stage, and 4 clinical phase III programs, 32 clinical phase II projects, and 73 clinical phase I projects.
Efficiency improvements drive gross margin growth. Free cash flow continued to be positive in 2023. The gross profit margin of the company's main business was 41.17%, an increase of 3.88 pts over the same period last year. It was mainly affected by improved operating efficiency, changes in project portfolio, and exchange rate changes. In terms of expenses, the company's 2023 sales (701 million, -4.18%), management ($2,879 million, +1.88%), R&D (-1.441 million, -10.74%), and finance (-338 million, +36.36%) expenses were 1.74%, 7.14%, 3.57%, and -0.84%, respectively, down 0.12, 0.04, 0.53 and 0.21 percentage points from the same period last year. The expense ratio remained stable. The company's net operating cash flow was $13.387 billion, up 26.10% year over year, mainly due to exchange rate effects, steady growth in receipts, and continuous optimization of working capital management. At the same time, the company continued to improve asset utilization, with capital expenditure of 5,517 billion yuan in 2023, and free cash flow continued to be positive.
Profit Forecasts and Investment Ratings
As a leading domestic CXO enterprise, the company's integrated, full-process pharmaceutical R&D service platform continued to gain strength in 2023, and various business segments achieved steady growth. Among them, the chemical business excluded specific project orders and maintained rapid growth. At the same time, the company continues to promote the improvement of operating efficiency and further enhance profitability. Despite the uncertainty of the external environment in 2024, we expect the company's integrated service model to continue to draw on its unique advantages and continue to attract more customers, especially long-time customers. Driven by the recovery in overseas and domestic pharmaceutical R&D demand, the conventional business is expected to remain stable. At the same time, the new molecule business is expected to maintain rapid growth, operating efficiency and asset utilization will continue to improve, and profitability will be further enhanced, and the company's long-term development prospects are optimistic.
We expect the company to achieve revenue of 39.550 billion yuan, 43,045 billion yuan, and 47.905 billion yuan respectively from 2024 to 2026, with apparent year-on-year changes of -2.0%, +8.8% and +11.3%, respectively; excluding COVID-related businesses, revenue from 2024 to 2026 will increase 5.9%, 8.8%, and 11.3%, respectively. Net profit attributable to mother was $9.451 billion, $10.479 billion, and $11.760 billion, with year-on-year changes of -1.6%, +10.9%, and +12.2%, respectively. Equivalent EPS is 3.22 yuan/share, 3.57 yuan/share, and 4.01 yuan/share, respectively. The corresponding PE is 14.9X, 13.4X, and 12.0X, maintaining the purchase rating.
Risk analysis
1. The number of new drug developments falls short of expectations: the continuous demand for new drug research and development from customers is an important driving force for the continuous growth of the company's performance, and falling short of expectations will adversely affect the company's performance;
2. The company's on-hand order growth is lower than expected: the growth of on-hand orders is an important reminder of the company's future revenue growth expectations. The growth in on-hand orders may lead to a decline in the company's expected performance, which in turn affects the company's valuation; 3. Fierce competition in the industry is currently competitive with the company in terms of pre-clinical and clinical business. Intense competition will increase the pressure on the company to reduce costs and increase efficiency, which will adversely affect the company's performance growth rate; 4. The impact of rapid expansion of production capacity may cause new production capacity to quickly increase performance and affect capacity utilization and cost amortization.
5. Risk of fluctuations in the external operating environment: The company was mentioned in the proposed bill (hereinafter referred to as the “draft”) submitted to the US House of Representatives and the US Senate in January 2024. The draft pre-defines the company as a “concerned biotechnology company,” which may have a certain impact on the company's services to customers with business relationships with the US government. The legislative process will still have to go through many steps before the draft becomes effective and promulgated. Therefore, the content of the draft (including the part referring to the Company) is still subject to further review and may be changed.
6. Sensitivity analysis of relevant US laws: In 2023, the company's revenue from customers in the US region is relatively large. For example, after the company's proposed US law is passed, it may affect the company's business development in the US region. The current profit forecast for the company is based on neutral assumptions about the relevant legislation. Based on an optimistic scenario, we expect the company's corresponding revenue for 2024-2026 to be adjusted from the current 39.550 billion yuan, 43,045 billion yuan, and 47.905 billion yuan to 46.465 billion yuan, 50,571 billion yuan, and 56.281 billion yuan, and net profit to mother will be adjusted from the current 9.451 billion yuan, 10.479 billion yuan, and 11.760 billion yuan to 11.104 billion yuan, 12.085 billion yuan, and 13.816 billion yuan. Based on the pessimistic scenario, we expect the company's corresponding revenue for 2024-2026 to be adjusted to RMB 21,445 billion, RMB 27.584 billion, and RMB 30.698 billion, and net profit to mother will be adjusted to RMB 5.125 billion, RMB 5.578 billion, and RMB 6.376 billion.