In 2023, mainland business profits grew rapidly, with significant cost reduction and efficiency results: 2023 revenue increased 0.7% to 26.2 billion yuan (RMB, same below), in line with our expectations; revenue from innovative products (including biosimilar drugs) increased 13.3% to 9.9 billion yuan, accounting for a further increase of 38% from 33% in 2022. By treatment sector, the annual revenue of the oncology sector fell 4.2%, but 2H23 still recorded a 2% increase in industry regulation; the rest of the core sectors remained stable or recorded positive growth: liver disease -0.4%, respiratory +1.4%, surgery +9.0%, and cardiovascular +2.5%. The adjusted net profit of the continuing business increased by 1.5% throughout the year. After excluding the impact of overseas businesses such as F-star, the adjusted net profit of the mainland business increased by 13.3%. The operating profit margin continued to rise slightly by 0.2 ppts to 20.8%. Thanks to effective control of sales and management expenses (expense ratio - 2.8 ppts to 42.2%), the number of marketers decreased by 4% while per capita output increased by 4%. Of R&D expenses, the share of innovative drug development increased by 1ppt to 77%.
2024 guideline update: The volume of new products/sub-new products accelerated revenue growth, the share of innovative products increased to 43%, R&D expenses were relatively stable, and at least 5 BD transactions were completed.
The core treatment field is making concerted efforts, and 9 new products are expected to be launched in 2024-25: the company expects PD-L1, Alk/cMet inhibitors, ROS1/Alk/cMet inhibitors, and liraglutide to be approved for marketing in 2024, and 5 more products will be approved in 2025. Tumors: Future major product development will continue to focus on anlotinib. It is also expected to be approved for important indications such as 1L SCLC, 3L endometrial cancer, 1L RCC, and 1L soft tissue sarcoma in 2024-25. The company expects peak sales of anrotinib to exceed 10 billion dollars; in addition, KRAS G12C inhibitors will disclose 2L NSCLC registration phase II data at the AACR 2024 conference. CDK2/4/6 inhibitors will read 2L- HR/HER on 2H24 Breast cancer stage III data. Respiration: IL-4R reads AD phase II data in 2024 and phase III starts in 2025. Surgery/analgesia: It is expected that more than 10 new patch products will be launched within 10 years.
Target price increase: We lowered the company's 2024-25E net profit forecast by 14-18% to 2.75 billion/3.30 billion yuan, which mainly reflects the company's continued divestment of non-core businesses after focusing on the four major treatment areas. We are more optimistic about long-term profit margins, considering that 2023 profit margins and cost reduction results exceeded expectations. We raised our DCF target price to HK$4.80 (previously HK$4.55), with a potential increase of 59%. We continue to give the company a buying rating, and we are optimistic about the certainty that its innovative drug will drive short-term performance recovery and long-term high growth.