Description of the event

The company released its 2023 annual report. The company achieved operating income of 4.579 billion yuan, a year-on-year decrease of 65%, realized net profit of 303 million yuan, an increase of 567% over the previous year, and realized net profit without deduction of 139 million yuan, an increase of 137% over the previous year.

Incident comments

In 2023, the company successfully achieved comprehensive transformation, accelerated the strategic focus of the cosmetics and pharmaceutical business, and accelerated the cosmetics business. In 2023, the company's cosmetics business achieved revenue of 2,416 billion yuan, up 23% year on year, gross margin increased 1.16 percentage points year on year, pharmaceutical business achieved revenue of 520 million yuan, up 1.61% year on year, and gross margin increased 0.39 percentage points year on year; raw materials business achieved 351 million yuan, up 23% year on year, and gross margin decreased 1.76 percentage points year on year, mainly due to market competition factors. Focusing on the cosmetics business, Yilian achieved revenue of 857 million yuan, an increase of 20% over the previous year; Dr. Eyre achieved revenue of 1,348 billion yuan, an increase of 27% over the previous year. Cosmetics online channel revenue increased 20% year over year, gross margin increased 2.12 percentage points year over year, revenue from other cosmetics channels increased 42% year over year, and gross margin narrowed by 5.27 percentage points year on year. On the profit side, Freda Biotech (consolidated caliber), which mainly operates cosmetics business throughout the year, achieved operating income of 2.4 billion yuan, net profit of 215 million yuan, a net profit margin of 9%, and maintained good profitability.

2023Q4's cosmetics business has performed well, while the pharmaceutical sector is still undergoing phased adjustments. The company achieved operating income of 1,184 billion yuan, a year-on-year decrease of 73.23%; realized net profit of 65 million yuan, an increase of 160.33% over the previous year; and realized net profit of 31 million yuan without return to mother, an increase of 130.43% over the previous year. Among them, the cosmetics business achieved revenue of 762 million yuan, an increase of 41.2% over the previous year. Due to the impressive performance of the Double Eleven promotion, Dr. Aier/Yi Lian increased by 45%/42% year on year; the raw materials business achieved revenue of 98.24 million yuan, up 85% year on year, and gross margin decreased 18 percentage points year on year; the pharmaceutical business achieved 121 million yuan, down 31% year on year, and gross margin fell 4.33 percentage points year on year. The slowdown in revenue and gross margin is expected to be mainly due to disturbances in the pharmaceutical policy phase.

Looking ahead, recombinant collagen ingredients and brand-side layout are accelerating, approval of raw materials is progressing smoothly, and subsequent growth can be expected. In the cosmetics business, the company completed infrastructure construction of an intelligent production base for collagen medical devices, realized trial production of recombinant humanized collagen raw materials, promoted the filing of recombinant humanized collagen raw materials, and launched the medical and aesthetic brand Ke Mi. In terms of raw materials, derivatives, and additives, we continue to promote the registration of raw materials at home and abroad. Eye drops-grade sodium hyaluronate pharmaceutical excipients, and ecdoine pharmaceutical excipients have completed CDE registration domestically, eyedrop-grade sodium hyaluronate pharmaceutical excipients have obtained CEP certificates issued by EDQM, and ekedoin has obtained the US FDA's DMF registration for active ingredients.

In 2023, the company successfully completed a comprehensive transformation to accelerate the strategic focus of the cosmetics and ingredients business, and institutional changes are expected to revitalize the organization. By business, cosmetics business: the main brands are promoting new products and strengthening the health of the long-term product matrix. At the same time, gross margin has increased in the process of increasing the share of high-quality products, which is expected to gradually cover the increase in cost investment, so that the company can still maintain relatively stable profitability; raw materials business: the company continues to promote the production of recombinant collagen and raw material filing to consolidate the raw material product matrix to strengthen long-term growth momentum; at the same time, the pharmaceutical business is expected to enter a stage of steady development after the influence of the industry gradually recedes. Based on the above, we expect the company's net profit to be 361, 4.72, and 558 million yuan respectively in 2024-2026, maintaining a “buy” rating.

Risk warning

1. The new product development and launch process fell short of expectations; 2. The level of competition in the industry exceeded expectations; 3. Increased channel traffic costs; 4. Risk of weakening excess traffic.