2023 results are in line with our expectations

The company announced 2023 results: revenue of 357 million yuan, a year-on-year decrease of 65.49%; net loss to mother of 1,483 million yuan, mainly due to the negative impact of the COVID-19 vaccine business, and the performance is in line with our expectations.

Development trends

Regular business performance is outstanding, and commercialization continues to advance. Starting in 2023, the company's sales focus changed from the COVID-19 vaccine to the influenza vaccine. The two influenza vaccine products (MCV4 Manheixin and MCV2 Minahi) achieved sales revenue of 562 million yuan, an increase of 266.39% over the previous year, of which MCV4 contributed the main revenue.

MCV4 is currently suitable for children aged 3 months to 3, and clinical trials of this product are also being extended to children and adults aged 4 years and above.

Most of the negative effects of the COVID-19 vaccine have been reflected on the reporting side. 1) Revenue side: The company accounts for COVID-19 vaccine returns that have occurred or may occur in the future, reducing revenue of about 253 million yuan in 2023.

2) Cost side: Reducing revenue from COVID-19 vaccines corresponds to a cost reduction of 111 million yuan. At the same time, redundant COVID-19 vaccine production capacity corresponding to fixed costs of 255 million yuan is included in operating costs. 3) Asset impairment preparations: Also due to the decline in demand for COVID-19 vaccines, the company's asset impairment preparations for indicative inventory, return costs receivable, prepaid accounts, and long-term assets totaled 967 million yuan. Up to now, we expect that most of the negative effects of the company's COVID-19 vaccine business have been reflected on the reporting side, and there will be few subsequent negative effects.

The research pipeline is rich in reserves, focusing on conventional vaccine research and development. In terms of the research pipeline, the marketing application for PCV13i of the 13-valent pneumococcal conjugate vaccine has been accepted; the infant component dTdCP has completed the enrollment of phase III subjects, and we expect it to be submitted for marketing in 2025; the adsorbed tetanus vaccine has initiated phase III clinical trials; the recombinant shingles vaccine (adenovirus vector) has initiated phase I clinical trials in Canada; and the recombinant polio vaccine has initiated phase I clinical trials in Australia. Additionally, the company and AstraZeneca have entered into a cooperative development agreement on mRNA vaccine development. We are optimistic about the company's existing pipeline reserves.

International cooperation is progressing at an accelerated pace, which is beneficial for vaccines to go overseas in the future. In 2023, the company made many advances in the internationalization of its products: 1) signed a strategic cooperation agreement with Indonesia's Etana to promote the localization of products such as tuberculosis vaccine and quadrivalent influenza conjugate vaccine in Indonesia; 2) signed a project funding agreement with the Gates Foundation to support the development of the company's VLP recombinant polio vaccine; 3) equity investment in Solution Malaysia to promote R&D cooperation and commercialization of the company's products in the region.

Profit forecasting and valuation

Considering fluctuations in the number of domestic births, we conservatively lowered the company's profit forecast for 2024 from a loss of 541 million yuan to a loss of 567 million yuan, and the profit forecast for 2025 from a loss of 186 million yuan to 372 million yuan. Considering the reduction in profit forecasts and the recent downward trend in the valuation center of the A/H vaccine sector, based on the DCF model, we maintained the A/H share outperforming industry rating, lowered the target price of A shares by 9.4% to $49.14 (41% space), and lowered the target price of H shares by 6.4% to HK$15.92 (40% space).

risks

COVID-19 vaccine price reduction risk; commercialization falls short of expectations; R&D progress falls short of expectations.