2023 results are in line with our expectations

The company announced its 2023 results: revenue of 138 million yuan, up 126 million yuan; net loss of 1,964 million yuan (vs net loss of 556 million yuan in '22). Excluding fair value losses of convertible redeemable preferred shares, listing expenses, and share-based payment expenses, the adjusted net operating loss was 329 million yuan.

The results were in line with previous forecasts and our expectations, and the rapid increase in revenue mainly benefited from the rapid expansion of the hair and skin care product line.

Development trends

1. The hair and skin care product line was launched quickly, and the second hair growth curve was successfully cultivated. View by product line:

① Hair: Revenue in 23 years exceeded 96 million yuan, +933% over the same period, accounting for about 70% of revenue, mainly driven by the star product, Little White Tube. Since its launch in December '22, the cumulative sales volume of Xiaobai Tube has exceeded 600,000 bottles, ranking among Tmall/JD's top 1 overseas skin medications; in addition, new products such as ketoconazole hair lotion and blue silk geometric selenium disulfide lotion have been successfully cultivated. At the same time, the revenue contribution of products other than small white tubes in the hair category increased to about 27% in 23 years; at the same time, user stickiness continued to increase, and Tmall continued to increase. The repurchase rate of Flute overseas flagship stores began in early '23 20% has risen to over 30% since the end of 23. ② Skincare: Revenue exceeded 41 million yuan in 23 years, accounting for about 30% of revenue. Since September, it has exclusively represented the high-end American skincare brand Omar in the domestic market. Sales have climbed rapidly, fully verifying the team's commercialization ability.

2. Changes in product structure have led to phased pressure on gross margin, and the net loss ratio has narrowed due to scale effects. The company's gross margin in '23 was 18.2ppt to 51.6% year-on-year, mainly due to the increase in the revenue share of Omar, a skincare brand that is still in the early stages of cultivation and has a low gross margin. On the cost side, sales/management/ R&D expenses were +480%/+85%/+19% year-on-year to 2.1/1.9/220 million yuan, respectively. The increase was significantly lower than the revenue growth rate. The increase was mainly due to the continuous promotion of the commercialization process, which led to scale effects, compounded by improvements in operational efficiency. In the end, the company's net loss was 1,964 million yuan, and the adjusted net operating loss was 329 million yuan. The net loss ratio narrowed.

3. Multi-pipeline R&D is progressing smoothly, and we are optimistic about medium- to long-term growth space. According to the company's announcement: ① Hair loss: topical finasteride (CU-40102) NDA was accepted in January '24, and thyroid hormone receptor agonist (CU-40101) completed phase I clinical trials in November '23; ② local anesthesia: lidocaine (CU-30101) completed phase III clinical trials in January '24; ③ Localized fat management: recombinant mutant collagenase (CU-20401) under-chin fat accumulation management indications Phase II clinical trial completed in January '24. Phase I clinical trials were completed in February '24; ④ Skin: The NDA for topical minocycline (CU-10201) was accepted in September 23 and included as a priority review category. We think it is expected to speed up the approval process; the IND application for novel topical small molecule drugs (CU-10101) was accepted in March '24. We are optimistic about the company's medium- to long-term growth space as a skin management platform.

Profit forecasting and valuation

Considering that the commercialization process of the company exceeded expectations, we raised our 2024 revenue forecast by 22% to $280 million to maintain the 2025 revenue forecast; at the same time, considering the increase in costs and cost investment during the brand development period, we maintain the 2024-25 profit forecast. Maintaining an outperforming industry rating, maintaining a target price of HK$12.7 according to the DCF model, with 61% upside compared to the current stock price.

risks

Product commercialization falls short of expectations; clinical progress falls short of expectations; risk of medical accidents.