Incident: The company released its 2023 annual report. In 2023, the company achieved operating income of 11.538 billion yuan, an increase of 12.39%; net profit to mother of 1,601 billion yuan, up 16.48% year on year; net profit after deducting non-return to mother of 1,514 billion yuan, up 6.37% year on year; adjusted non-IFRS net profit of 1.903 billion yuan, up 6.37% year on year; and operating cash flow of 2.754 billion yuan, up 28.50% year on year.
Revenue continued to be steady, and multiple factors disrupted non-IFRS net profit. On a quarterly basis, 2023Q4 revenue was $2,978 million (+3.99%), attributable to mother of $462 million (+11.74%), after deducting non-431 million yuan (+18.42%), and adjusted non-IFRS net profit of $491 million (-3.06%). The growth rate of adjusted non-IFRS net profit is faster than that of adjusted non-IFRS net profit. We expect: ① Overseas operating costs in 2023 continued to increase due to inflation in Europe and the US and the impact of early investment stages, putting pressure on the cost side; ② the income from changes in the fair value of biological assets held by the company in 2023 decreased compared to the same period last year. We expect to exclude the impact of changes in the fair value of biological assets. The company's adjusted non-IFRS net profit increased by about +11.34% in 2023. In terms of profitability, the company's overall gross profit margin in 2023 was 35.75% (-0.96pp), and the net profit margin was 13.71% (+0.54pp). Sales expenses of 253 million yuan (+9.87%), expense ratio 2.19% (-0.05pp). Management expenses of 1,707 million yuan (+7.26%), expense ratio 13.92% (-0.67pp).
Financial expenses of 5.26 million yuan, cost ratio 0.05% (-1.67pp), R&D expenses of 448 million yuan (+58.78%), cost ratio 3.89% (+1.14pp).
The competitive advantage of integrated and multi-therapy platforms continues to strengthen, and small-molecule CDMO production capacity is expected to drive continued growth in the overall business. 1) Laboratory services: 2023 revenue of 6.660 billion yuan (+9.38%), gross profit margin of 44.28% (-1.25pp). The profitability of laboratory services is expected to gradually recover as the large-scale advantages of chemistry and bioscience continue to be released and the share of biological sciences continues to increase. 2) Small molecule CDMO: 2023 revenue of 2,711 billion yuan (+12.64%), gross profit margin of 33.68% (-1.11pp). The company has strong CMC technical strength and rich project reserves. With the gradual implementation of epitaxial and endogenous commercial production capacity, the proportion of post-clinical projects continues to increase, and the small molecule CDMO business is expected to maintain steady growth. 3) Clinical research services: 2023 revenue of $1,737 billion (+24.66%), gross profit margin 17.05% (+5.59pp).
With the gradual completion of integrated clinical research service platforms, Detaimai, Nanjing Sirui, and UniStar complement each other's advantages, and it is expected that they will continue to grow rapidly in the future. 4) Macromolecule and cell gene therapy: 2023 revenue of $425 million (+21.06%), gross profit margin -8.30% (-6.13pp). ① C>: Invest in AccuGenGroup, acquire Vaccine and ABL to create an integrated pre-clinical to clinical C> service platform; ② Macromolecules: Extend macromolecule discovery research services from laboratory services, build a macromolecule production base in Ningbo to build an end-to-end macromolecule R&D and production platform, and it is expected that they will gradually begin to undertake macromolecule GMP production service projects.
Profit forecast and investment advice: Considering that the cost side of the company's business is expected to be greatly affected by depreciation and amortization after overseas investment and financing and production capacity release, we adjust the profit forecast. We expect the company's operating income in 2024-2026 to be 12.726 billion yuan, 14.531 billion yuan and 16.716 billion yuan respectively (about 13.011 billion yuan and 15.072 billion yuan before the adjustment), up 10.30%, 14.18%, and 15.03% year-on-year; net profit to mother was 1,731 billion yuan and 19.65 billion yuan, respectively 100 million yuan and 2,308 billion yuan (about 1,807 billion yuan and 2,058 billion yuan before the adjustment period 2024-2025), increased by 8.10%, 13.56%, and 17.43% year-on-year. The corresponding PE valuations for 2024-2026 were 21.04, 18.53, and 15.78 times, respectively. As one of the leading CRO+CDMO enterprises in China, the company has significant advantages in integrated service platforms. In the future, as end-to-end and multi-therapy service platforms continue to be perfected, it is expected to drive continued growth in performance and maintain a “buy” rating.
Risk warning events: the risk of innovative drug companies' R&D investment falling short of expectations, the risk that the gross margin of the CMC business will fall short of expectations, the risk of the competitive environment deteriorating, and the risk of exchange rate fluctuations.