Profit in 2023 was significantly higher than our expectations
The company announced its 2023 results: revenue of 13.7 billion yuan, up 21% year on year; net profit to mother of 2.7 billion yuan, up 71% year on year. 2H23's revenue was 6.8 billion yuan, up 11% year on year; net profit to mother was 1.4 billion yuan, up 49% year on year. The company's revenue for 2023 was in line with our expectations. Net profit was significantly higher than our expectations due to high intermediate prices and full production throughout the year.
Development trends
Intermediates profits are growing rapidly, and the price of 6-APA is strong at a high level. 1) Intermediates: 2023 revenue of 2.32 billion yuan (+44.9% YoY), segment profit of 1.99 billion yuan (+116% YoY), segment profit margin increased 13.2 ppts year-on-year to 34.5%. 2H23 revenue of 1.27 billion yuan (+47.9% YoY), segment profit of 1.17 billion yuan (+139% YoY), and segment profit margin increased 17.4 ppts year-on-year to 38.2%.
We estimate that the average market price of 2H23 6-APA was about 364 yuan/kg, which was the same year on year, with a slight decline from month to month. The company expects the average transaction price in 1Q24 to be basically the same year on year, and the average monthly price fluctuates due to the export and order structure. 2) APIs: 2023 revenue of 6.40 billion yuan (+23.7% YoY), segment profit of 780 million yuan (+103% YoY), segment profit margin increased 4.2 ppts year-on-year to 10.6%. Production of the company's intermediates and semisynthetic penicillins will be completed throughout 2023. The company expects that the domestic production capacity of 6-APA will not change much in 2023. The capacity utilization rate of the company and several major suppliers is high; India's production capacity investment is limited this year, and European production capacity is declining. Demand for downstream penicillin-type antibiotic products is strong, and the company plans to increase production capacity for ampicillin raw materials and oral clavulanate potassium preparations in 2024.
Revenue in the pharmaceutical sector grew steadily, and segment profits declined. In 2023, the company's pharmaceutical revenue was 5.02 billion yuan (+10.2% YoY), segment profit was 590 million yuan (-26% YoY), and the segment profit margin fell 5.8 bps to 11.7% year on year. 1) Revenue from human antibiotics was 2.15 billion yuan (+3.2% YoY), and tazoxian won the bid for the eighth batch of collection, with revenue up 0.6% year-on-year to 680 million yuan; 2) Insulin revenue of 1.12 billion yuan (-4.9% YoY). It is recommended to pay attention to the progress of domestic insulin procurement renewal in April; 3) Veterinary drug revenue is 1.18 billion yuan (+48.1%). Currently, 94.5% of the revenue is animal medicine. The company is actively deploying new pet drugs.
The R&D pipeline is progressing smoothly. With an R&D investment of 81 million yuan (+36.2% YoY) in 2023, the company expects rapid growth in R&D over the next 1-2 years as many new varieties enter clinical trials. The company expects liraglutide injection (diabetes) to be approved in 2024, and simeglutide injection diabetes/weight management indications to be approved in 2025/2027. The UBT251 injection (GLP-1/GIP/GCG three agonist) has completed both reports between China and the US. The domestic Ib phase is being enrolled, and the company plans to seek overseas MNC partners.
Profit forecasting and valuation
As the company's capacity utilization rate exceeded expectations, we raised the 2024 EPS forecast by 31% to 1.52 yuan, and introduced the 2025 EPS forecast of 1.55 yuan for the first time. The current share price corresponds to 5.2/4.9x 2024/2025 P/E. Maintaining an outperforming industry rating, the target price was raised by 31% to HK$10.5, corresponding to 6.0/5.7x2024/2025 P/E, with 17% upside compared to the current share price.
risks
R&D progress falls short of expectations, and there is a risk that intermediate prices will fall.