Incident: The company released its 2023 annual report on March 29, achieving full year revenue of 980 million yuan, YoY +23.6%; net profit to mother of 180 million yuan, YoY +73.6%; deducted non-net profit of 100 million yuan, YoY +28.4%. The performance was in line with market expectations. Our comprehensive review is as follows:
Products have entered the mass production stage one after another; research reserves guarantee long-term development potential. 1) Looking at a single quarter: 4Q23 achieved revenue of 250 million yuan, YoY +19.7%; net profit to mother of 54 million yuan, YoY +782.3%; deducted non-net profit of 4.23 million yuan, compared to 2.66 million yuan in 2022. 2) Profitability: 4Q23 gross margin decreased 1.2ppt to 74.9% yoy; net margin increased 22.1ppt to 25.4% yoy. Gross margin decreased by 2.6ppt to 74.2% yoy in 2023; net margin increased 5.9ppt to 19.2% yoy. In 2023, Shanghai Wanze completed R&D and batch production of nearly 10 models, with a total of 123 new products under development. Research reserves guarantee long-term development potential.
Pharmaceutical products grew steadily; superalloy revenue surged 52%. By product, 2023:1) Sales of superalloy materials achieved revenue of 250 million yuan, YoY +52.0%, gross margin decreased by 5.55ppt to 35.8% year on year; 2) Jin Shuangqi achieved revenue of 500 million yuan, YoY +21.5%, gross margin decreased by 0.1 ppt to 88.8% year on year; 3) Ding Junsheng achieved revenue of 200 million yuan, YoY +10.1%, and gross margin increased 0.35 ppt to 91.8% year on year. Among the major superalloy subsidiaries, 2023:1) Shanghai Wanze's revenue was 200 million yuan, YoY +72.5%, net profit of 10.93 million yuan, 630,000 yuan in the same period in 2022; 2) Shenzhen-Shantou Wanze's revenue of 83 million yuan, YoY -4.5%, net profit of 50.4 million yuan, 31.9 million yuan for the same period in 2022; 3) Zhongnan Research Institute's revenue was 62 million yuan, YoY -22.4%, net profit of 13.59 million yuan in the same period in 2022.
In summary, revenue from superalloy materials and pharmaceuticals has increased to varying degrees; in the field of new materials, Shanghai Wanze's revenue is growing rapidly, and on the profit side, the profitability of Shanghai Wanze and Zhongnan Research Institute is gradually increasing.
The cost ratio was continuously optimized during the period; R&D investment continued to be increased. The company's expense ratio decreased by 5.1ppt to 56.9% year-on-year in 2023, and equity incentive expenses increased by 6.22 million yuan to 42.66 million yuan year-on-year. Among them: 1) R&D expenses increased 38.7% year on year to 110 million yuan, R&D expenses increased by 1.2ppt to 10.8% year on year, and the company continued to increase R&D investment; 2) management expenses decreased by 0.6ppt to 15.9% year on year; 3) sales expenses decreased 5.5 ppt to 27.8% year on year; 4) financial expenses decreased by 0.2ppt to 2.4% year on year. By the end of 2023, the company's bills receivable and accounts receivable were $340 million, up 3.8% from the end of 3Q23; inventory was $220 million, up 16.3% from the end of 3Q23; and projects under construction amounted to $61 million, an increase of 41.6% over the end of 3Q23, mainly continued investment in the construction project of the biomedical R&D headquarters and industrialization base in Zhuhai. The company's net cash flow from operating activities in 2023 was 100 million yuan, compared to 200 million yuan for the same period in 2022.
Investment advice: The company has continuously optimized its business layout, and has become a leading pharmaceutical microecological bacteria leader in China, and has accumulated wealth in the field of superalloys and products. After ten years of refinement, it has grown into a core supplier of “two-engine” hot-end components. Production and research capabilities for master alloys, cast blades, and powder turbines are scarce. We expect the company to achieve net profit of 270 million yuan, 360 million yuan, and 460 million yuan respectively from 2024 to 2026. The corresponding PE is 23x/18x/14x, respectively, maintaining the “recommended” rating.
Risk warning: downstream demand falls short of expectations; the pace of mass production of models under development falls short of expectations; product price reduction, etc.