Key points of investment

Financial performance: Significant month-on-month increase in revenue, profitability recovery 2023: revenue of 403 million yuan, up 6.55% year on year; achieved net profit of 86 million yuan, down 7.48% year on year; gross sales margin of 60.20%, up 1.55 pcts year on year, net sales margin 21.30%, down 3.23 pcts year on year; 2023Q4: revenue of 120 million yuan, up 6.79% year on year, +23.40% month on month; realized net profit to mother of 31 million yuan, up 16.24% year on year, increase month on month 31.00%;; gross sales margin was 61.66%, up 3.62 pcts year on year and 1.96 pcts month on month; net sales margin was 25.93%, up 2.11 pcts year on year, up 1.50 pcts month on month.

Business division: The company's high-end chemical revenue was 210 million, YOY +14.72%, gross profit margin of 59.23%, an increase of 1.22 pcts; life science 95.57 million, YOY -11.45%, gross margin 66.03, an increase of 8.18 pcts; analytical chromatography 51.75 million, YOY 5.97%, gross profit margin 57.79%, a decrease of 4.81 pcts; material science 31.85 million, YOY 29.06%, gross profit margin 58.99%, a decrease of 5.14pcts.

Growth capacity: Biological reagents and overseas are expected to drive the company's 24-year growth capacity. The life science sector is slowing down due to the influence of the 22-year high base. We anticipate a return to high growth in 2024 as the company's acquisition of Yuanye Biotech empowers products and channels in the life sciences sector. Looking ahead to 2024, we believe that rigid investment in scientific research is still there. Combined with the gradual recovery of the investment and financing environment, the company's revenue side is expected to achieve stable endogenous growth higher than the industry, and 24Q1-Q4 may show a clear month-on-month recovery trend. Furthermore, the company added a leased US warehouse in 2024, and the expected fulfillment of overseas revenue will have a certain impact on the company's performance.

Profitability: Q4 was drastically restored to the highest point in nearly 7 quarters, and the company's Q4 gross profit margin and net profit margin all increased significantly year-on-year and month-on-month, reaching the highest point in nearly 7 quarters. This aspect shows the strong bargaining power of the company's products upstream and downstream, and also shows that the company's management of cost reduction and fee control is gradually showing results. We believe that in light of the current industry climate and the company's development stage, we expect gross margin growth and cost ratio optimization in each quarter of 2024 to be relatively limited compared to the 23Q4 level.

Cash flow from operating activities: The number of inventory turnover days decreased quarterly, and the company's cash flow was positive in '23. In Q4, cash flow from operating activities increased markedly year-on-year and month-on-month, mainly driven by a significant decrease in inventory. With the completion of the three-year listing plan, we believe that in the future, the company will gradually move from expanding its product line and increasing storage in multiple locations to the stage of improving operating capacity, and the inventory turnover rate is expected to continue to improve in the future.

Acquire Yuanye Biotech to empower new segments with customers and channels

On March 18, 2024, the company announced that it intends to use bank loans and self-financing of 181 million yuan to acquire 51% of Shanghai Yuanye Biotech's shares. Yuanye Biotech, founded in August 2009, has obvious advantages in biochemical reagents, standard products and other related products. This merger and acquisition can enrich the company's biochemical reagent product line, complement customer resource advantages, share resources in product development, R&D, quality control, production, warehousing and online sales, expand the scale of the business, promote the development of the main business, and enhance the company's overall competitiveness. Yuanye Biotech promises to deduct no less than 33 million/40 million/47 million yuan in 24-26. We expect to achieve this in Q2 2024.

Profit forecasting and valuation

Considering current industry demand and the increase in performance due to mergers and acquisitions, we forecast the company's net profit to mother for 2024-2026 to be $126 million, $158 million and $192 million, respectively, and EPS of 0.64, 0.80, and 0.97 yuan/share, respectively.

The corresponding closing price on April 1, 2024 is about 24 times PE in 2024. Maintain an “gain” rating based on comparable company valuations and industry positions.

Risk warning

The volatility of the impact of depreciation of new fixed assets, equity incentives, and exchange on apparent performance; volatility in the profit cycle of new businesses; and a decline in the investment and financing boom in innovative pharmaceuticals.