Incident: The company released its 2023 annual report, achieving revenue of 2,376 million yuan (YOY +4.78%); achieving net profit attributable to mother of 397 million yuan (YOY -63.04%); and realized net profit of 338 million yuan (YOY -66.89%), which is lower than our previous expectations.

Comment:

Overall revenue is stable, and multiple factors affect profit levels. In '23, the company's non-clinical drug business achieved revenue of 2.39 billion yuan (YOY +4.31%), clinical and other services achieved revenue of 63 million yuan (YOY +27.95%), and the supply of experimental models achieved revenue of 4.06 million yuan (YOY -15.41%). The gross margin of each business was 43.22%/21.18%/36.06%. The year-on-year change was -5.09pp/ -10.52pp/+10.39pp, and the comprehensive gross margin decreased by 5.28pp to 42.62% year-on-year. The company's net profit declined sharply, mainly due to: 1) the gross margin of the laboratory service business declined due to increased competition, and the net profit contributed by this business fell 17.9% year over year to 470 million yuan; 2) changes in the fair value of biological assets caused a loss of 267 million yuan (333 million yuan in 2022).

Ongoing orders have declined, and overseas business is expanding rapidly. In '23, the company signed new orders of 2.3 billion yuan (YOY -39%), and up to the end of '23, there were 3.3 billion yuan of orders in hand, a decrease of 1.1 billion yuan from the end of '22. Among them, the overseas subsidiary Biomere received orders of about 340 million yuan, which is basically the same as in '22. In 2023, the company's overseas revenue was 579 million yuan (YOY +51.2%), reflecting the active expansion of the company's overseas business. Current development is mainly limited by production capacity bottlenecks.

The company is actively expanding overseas production capacity to further improve overseas customer service capabilities.

Profit forecast, valuation and rating: The global biomedical investment and financing boom is still recovering. The company is facing increased competition, and the fair value of biological assets has been drastically reduced. The net profit forecast for 24-25 was reduced to 5.53/713 million yuan (60.5%/60.0%, respectively), and the net profit forecast for the additional 26 years was 881 million yuan, corresponding to the 24-26 PE of 24/19/16 times, and the rating was downgraded to “increase holdings”.

Risk warning: The progress of new production capacity falls short of expectations; competition intensifies.