Incident: The company recently released its 2023 annual report. In 2023, the company achieved operating income of 1,742 billion yuan, a year-on-year increase of 15.27%, and net profit to mother of 524 million yuan, an increase of 34.60% year-on-year, after deducting non-net profit of 511 million yuan, an increase of 32.51% year-on-year, which is close to the median value of the previous performance forecast.

On a quarterly basis, in the fourth quarter of 2023, the company achieved operating income of 508 million yuan, a year-on-year increase of 30.49%, net profit to mother of 152 million yuan, an increase of 27.22% year-on-year, and net profit after deducting non-return to mother of 142 million yuan, an increase of 15.78% year-on-year.

The company's performance in the fourth quarter maintained a good growth trend, mainly due to the rapid recovery of routine diagnosis and treatment needs such as biochemistry and pathology. The profit growth rate in the single quarter was slightly lower than the revenue growth rate. It is expected to be mainly due to the low base of relatively low gross profit businesses such as 22Q4 biochemistry.

Cost dilution during the product structure optimization and superposition period, and profitability increased rapidly. In 2023, the company's sales expenses ratio was 20.90%, down 2.16 pp year on year, management expense ratio was 8.07%, down 0.27pp year on year, financial expenses ratio 2.42%, down 0.77pp year on year, R&D expenses ratio 9.35%, up 0.27pp year on year. The company's overall cost ratio was optimized, mainly due to the scale effect brought about by the expansion of overall revenue and the gradual reduction in equity incentive costs. At the same time, the company continued to accelerate investment in R&D of innovative diagnostic products, and the R&D cost rate increased. The company's gross profit margin in 2023 was 74.66%, up 0.07 pp year on year, and the company's net profit margin in 2023 was 29.98%, up 3.87 pp year on year.

The pathology business is resilient, and has performed well in various lines such as blood coagulation and biochemistry. In 2023, the company's reagent business achieved revenue of 1,634 billion yuan, up 14.43% year on year, instrument revenue of about 91 million yuan, up 32.29% year on year, instrument rental business revenue of 2.0438 million yuan, up 109.57% year on year, and inspection service and experimental support business revenue of 9.8524 million yuan, down 0.98% year on year; in 2023, the company's domestic revenue was 1.71 billion yuan, up 15.42% year on year, and overseas revenue was 7.87% year on year. Domestic demand for diagnosis and treatment recovered well in 2023. Among them, the pathology business achieved good results. Among them, the pathology business achieved revenue of 724 million yuan, an increase of 12.21% over the previous year. Despite the disturbance at the end of the 23Q1 epidemic, blood coagulation and biochemistry achieved rapid release through collection policies. We expect the company's pathology business to resume a rapid growth trend in 2024, and biochemistry are expected to continue growing rapidly in 2024.

Sinopharm cooperation is progressing smoothly, and more collaborations are expected to be implemented one after another in 2024. Since introducing Sinopharm as the company's largest shareholder, the company has continuously accelerated collaboration and integration with Sinopharm Group, introduced Sinopharm executives in 2023, completed division restructuring to achieve efficiency improvements in multiple dimensions such as R&D, production, quality control, and management; increased capital in early 2024 to further enhance overall competitiveness in the pathological market; at the same time, Sinopharm, the majority shareholder, has continued to increase its shares. The company actively embraces strategic changes and initiatives, and is expected to continue to invest in product R&D and mergers and acquisitions with Sinopharm in the future, marketing channels More cooperation has been implemented in other fields, and it has gradually grown into a comprehensive IVD enterprise with central enterprise quality and Sinopharm brand.

Profit forecast and valuation: Based on the annual report data, we adjusted the profit forecast. The continued recovery in downstream diagnostic demand is expected to drive the company's biochemical and pathology business to maintain a rapid growth trend. The company's revenue is expected to be 20.92, 25.12, and 3,018 billion yuan in 2024-2026, up 20%, 20% year on year, adjusted to 20.99 billion yuan and 2,539 billion yuan before 24-25; net profit from 2024-2026 is expected to be 6.06, 7.76, and 956 million yuan, up 16%, 28%, 23% year on year. 6.09 million yuan and 808 million yuan in 24-25 years before adjustment. The company's current stock price corresponds to about 19 times PE in 2024. Considering the upward trend in the company's biochemical and blood coagulation business, the pathological circuit continues to be booming, and new products such as chemiluminescence are expected to be rapidly released and maintain a “buy” rating.

Risk warning: Overseas cooperation falls short of expectations, marketing of new products falls short of expectations, and there is a risk that public data used in research reports may be delayed or not updated in a timely manner.