Core views

On March 22, the company released its 2023 annual report, and the performance was in line with expectations. The company achieved steady growth in the blood products business in 2023, the amount of pulp collected continued to increase, and breakthroughs were made in pulp station resources and R&D pipelines. The divestment of Fuda Pharmaceutical and Tianan Pharmaceutical is conducive to focusing on the development of the main business. It is expected that in 2024, strong supply and demand in the blood products industry will drive the steady growth of the company's blood products business; China Resources Group will continue to be empowered in the future to help increase the number of plasma stations and the scale of pulp collection, and improve operational efficiency. The company's product range is expected to increase, and products such as factor VIII and PCC will maintain volume, which will further improve the company's profitability.

occurrences

The company released its 2023 annual report, and the performance was in line with expectations

On March 22, the company released its 2023 annual report, achieving: 1) operating income of 2,652 billion yuan, a year-on-year decrease of 3.87%; 2) net profit to mother of 237 million yuan, a year-on-year decrease of 45.06%; 3) net profit after deducting non-return to mother of 143 million yuan, a year-on-year decrease of 63.51%; 4) basic earnings per share of 0.47 yuan. The performance was in line with expectations.

The company's 2023 profit distribution plan is to distribute a cash dividend of 3 yuan (tax included) to all shareholders for every 10 shares based on 504 million shares.

Brief review

The blood products business grew steadily throughout the year. Due to impairment of goodwill, profits were under short-term pressure. In the fourth quarter of 2023, the company achieved operating income of 462 million yuan, a year-on-year decrease of 31.71%; net profit due to mother - 227 million yuan, or 0.14 million yuan in the same period in '22; net profit after deducting non-return to mother - 218 million yuan, or 36 million yuan for the same period in '22. The year-on-year decline in the revenue side of the 23Q4 company was mainly due to the transfer of shares in Fuda and Tianan in 23Q4, leading to a high base for the same period in '22. The profit side was negative, mainly due to goodwill impairment preparations resulting from the acquisition of Xinbai Pharmaceutical.

In 2023, the company's overall revenue declined year-on-year. Among them, sales revenue from the blood products business maintained steady growth, and product profit margins were high, which led to an increase in overall net profit. Revenue from other business segments declined year-on-year. Among them, the diabetes business (Tianan Pharmaceutical) and drug distribution business (Fuda Pharmaceutical) completed equity transfers in September and November 2023, respectively. The decline in revenue from the biochemical pharmaceutical business (Xinbai Pharmaceutical) was mainly affected by a combination of market factors such as collection policies and adjustments to the national health insurance catalogue. Revenue from the chemical pharmaceutical business (Xinhe Pharmaceutical) declined, mainly due to the fact that products have not yet been scaled up. The profit side declined year-on-year, mainly due to preparations for impairment of goodwill.

Blood products business: The main business achieved steady growth, actively expanding the resources of plasma stations and R&D pipelines, and the revenue of static and liquid crystal growing rapidly, and PCC and VIII factor releases contributed to the increase. In 2023, the company's blood products business achieved revenue of 1,452 billion yuan, up 10.41% year on year, accounting for 54.75% of total revenue; gross profit margin was 69.74%, down 0.80pct from the same period in '22. Sales of the company's main blood products increased steadily in 2023. Among them, sales of intravenous human immunoglobulin (isopropyl) were 445 million yuan, up 15.55% year on year. The rapid growth rate was mainly due to strong market demand; sales of human blood albumin were 438 million yuan, up 4.26% year on year, maintaining steady growth; and sales of human fibrinogen were 419 million yuan, down 3.20% year on year, mainly due to a decrease in the price of fibrin in some regions after being collected. Revenue from other blood products was 150 million yuan, an increase of 94.95% over the previous year, achieving rapid growth. Among them, PCC continued to maintain a volume pace; after approval for listing, Factor VIII continued to promote local entry and sales, leading to increased performance.

Slurry production has maintained steady growth, and new breakthroughs have been made in pulp station resources and R&D pipelines. The company currently has 16 single plasma collection stations, including 14 plasma stations. The amount of pulp collected in 2023 was about 467.3 tons, an increase of 6.47% over the previous year. The output value of tons of slurry and gross profit of tons of slurry are at the forefront of the industry. In September 2023, the company was approved to set up single plasma collection stations in Taihe County and Leping City in Jiangxi Province, and a new breakthrough was made in plasma station resources. The company continues to promote the improvement of the operating level and efficiency of the pulping station, and the continuous expansion of the resources of the new pulping station. It is expected that the amount of pulp collected will continue to increase in the future. The company continues to focus on the cutting edge of technology and is focusing on promoting the research pipeline to diversify the variety of products and provide tons of slurry profits. In June 2023, the company's C1 esterase inhibitor was approved clinically, and new breakthroughs were made in the R&D pipeline; clinical research on vascular hemophilia factor (VWF) and intravenous human immunoglobulin (IVIG) (10%) projects continued to advance, and the product lineup under development was good.

Non-blood products business: Fuda and Tianan shares were transferred, and Xinbai and Xinhe saw a year-on-year decline in the diabetes medication business (Tian'an Pharmaceutical): Price changes affected revenue, and the shares were transferred to China Resources Shuanghe. In 2023, the company's diabetes medication business achieved revenue of 97 million yuan, a year-on-year decrease of 45.38%, accounting for 3.67% of total revenue; net profit of 15 million yuan, a year-on-year decrease of 45.06%. The decline in revenue was mainly affected by changes in product prices, and the shares have been transferred and are no longer included in the scope of the merger after the transfer. In September 2023, the company passed a bill to transfer 89.7% of Tianan Pharmaceutical's shares to China Resources Shuanghe for 260 million yuan; the share transfer was completed in November 2023.

Drug distribution business (Fuda Pharmaceutical): Performance declined slightly year-on-year, and shares have been transferred to China Resources Medical. In 2023, the company's drug distribution business revenue was 758 million yuan, down 6.93% year on year, accounting for 28.57% of total revenue; gross profit margin was 11.13%, down 1.70 pp from the same period in '22; net profit was 40 million yuan, down 6.13% year on year. In August 2023, the company passed a bill to transfer 75% of Fuda Pharmaceutical's shares to China Resources Medical for 365 million yuan; the share transfer was completed in September 2023.

Biochemical pharmaceutical business (Xinbai Pharmaceutical): Collection and medical insurance catalogue adjustments affect current performance. In 2023, the company's biochemical pharmaceutical business revenue was 337 million yuan, down 23.15% year on year, accounting for 12.64% of total revenue; gross profit margin was 76.42%, down 2.84pp from the same period in '22; net profit was 0.24 million yuan, down 19.14% year on year. The decline in performance was mainly affected by factors such as procurement policies and adjustments to the national health insurance catalogue.

Chemical pharmaceutical business (Xinhe Pharmaceutical): Production has not yet been scaled up, and business losses have occurred due to accrual impairment. In 2023, the company's chemical pharmaceutical business revenue was 0.1 billion yuan, down 28.06% year on year, accounting for 0.39% of total revenue; net profit - 57 million yuan, a decrease of 28.05% over the same period in '22. Production in the company's chemical pharmaceutical business has not been scaled up in 2023, and gross sales profit cannot fully absorb fixed asset depreciation and is in a state of loss.

The non-blood products business affected the overall gross profit margin. The company's gross profit margin was 52.76% in 2023, down 1.90 percentage points from '22, mainly due to the decline in gross margin of the non-blood products business. The company's expenses remained stable overall in 2023, including sales expenses of 583 million yuan, down 16.23% year on year, sales expense ratio of 21.97% (-3.24pp); management expenses of 195 million yuan, down 15.27% year on year, management expense ratio 7.35% (-0.99pp); R&D expenses of 68 million yuan, up 36.54% year on year, R&D expenses rate of 2.55% (+0.76pp); financial expenses -30 million yuan, financial expenses ratio -1.15% (-0.23pp). The decline in sales expenses and expense ratios is mainly due to the year-on-year decline in revenue from the non-blood products business, which corresponds to a decrease in sales expenses; at the same time, the blood products business's sales expenses ratio is low, and the share of revenue has increased, leading to a decrease in the overall sales expense ratio. The increase in R&D expenses is mainly due to the increase in the company's R&D investment. In 2023, the company's net operating cash flow was 642 million yuan, an increase of 7.59% over the previous year, and remained stable.

In 2023, the company's assets depreciated at 330 million yuan (53 million yuan in the same period in '22), of which Xinbai Pharmaceutical calculated goodwill impairment provisions of 298 million yuan, fixed asset impairment reserves of 0.14 million yuan, intangible asset impairment provisions of 0.13 million yuan, inventory depreciation reserves of 0.3 billion yuan, and impairment provisions of other non-current assets.

Profit Forecasts and Investment Ratings

The company is one of the leading domestic blood products companies. It is expected that in 2024, as demand for blood products continues to grow and the amount of pulp collected at existing plasma stations increases, strong supply and demand will drive the steady growth of the company's blood products business. China Resources Group will continue to be empowered in the future, which will help further grow the number of the company's pulp stations and the scale of pulp collection, and promote the improvement of operational efficiency. At the same time, the continued promotion of the R&D pipeline will help the company increase the variety of products, and maintain the pace of volume of products such as factor VIII and PCC, which will further improve the company's profitability. The company's net profit in 2023 was greatly affected by the impairment of Xinbai Pharmaceutical's goodwill. The impact of the impairment in 2024 is expected to be drastically reduced, compounded by the growth of the blood products business, and the company's profit side is expected to increase rapidly on a low base.

We expect the company's revenue for 2024-2026 to be 1,886 million yuan, 1,974 million yuan and 2.05 billion yuan, respectively, and net profit to mother of 535 million yuan, 583 million yuan and 644 million yuan respectively, up 125.3%, 9.0% and 10.5%, respectively. The company will gradually divest or dispose of the non-blood products business in the future, and the blood products business will achieve rapid growth. It is estimated that in 2024-2026, the company's blood products business revenue will be 1,641 billion yuan, 1,888 billion yuan and 2,092 billion yuan respectively, up 13.0%, 13.9% and 12.0% year-on-year respectively. EPS is 1.06, 1.16, and 1.28 yuan per share. The current stock price corresponding to the 2024-2026 valuation is 26.4X, 24.2X, and 22.0X, respectively, giving a purchase rating.