The 2023 performance was slightly lower than expected, and continued investment in R&D promoted the accelerated growth of innovative drugs: according to the company's announcement, 2023 achieved net profit of 31.45 billion yuan/6.07 billion yuan, +1.7%/-3.6% over the same period last year. In 2023, the company's R&D expenses reached 4.83 billion yuan, an increase of 21.2% over the previous year, accounting for about 18.8% of the company's proprietary pharmaceutical business revenue. Currently, through eight major technology platforms, the company focuses on key areas such as anti-tumor, neuropsychiatric, cardiovascular, immune and respiratory, metabolism, and anti-infection. The company expects 50 innovative drugs to be listed in the next 5 years, which will continue to inject momentum into the company's performance growth. We forecast a CAGR of 6.3%/9.7% for the company's revenue/net profit for 2023-26.
In 2023, the proprietary drug revenue structure is more balanced and will maintain steady growth in the future: in 2023, the proprietary drug business achieved revenue of 25.64 billion yuan, an increase of 4.6% over the previous year. By product, the neurological sector achieved revenue of 9.09 billion yuan in 2023, an increase of 12.1% over the previous year. The respiratory system sector achieved revenue of 1.56 billion yuan in 2023, an increase of 124% over the previous year. The main reason for the rapid growth rate of the respiratory system is the successful procurement bid and strong demand from the terminal market. Due to the reduction in collection prices, revenue from the anti-tumor and cardiovascular sectors decreased by 16.4% and 15.5%, respectively, in 2023. Considering new product launches, market sinking, retail channel development, etc., we expect the revenue growth rate of the company's proprietary pharmaceutical business to be 3.3%/1.5%/-1.5% in 24-26, respectively.
Revenue from the API and functional food business is expected to grow in 2024: In 2023, the company's VC business sales increased steadily, but due to falling prices, VC revenue fell 23.7% year on year. In 2023, the company's functional food revenue fell 8.9% year on year, mainly due to falling caffeine prices. Considering that VC and caffeine prices are expected to stabilize in 2024, we expect the company's API and nutraceutical business revenue to increase by 8.9%/10%, respectively, year-on-year in 2012.
Maintaining the purchase and lowering the DCF target price to HK$9.78: Based on the 2023 Annual Report, we lowered the company's revenue forecast. Our price target is 17x the 2024 P/E, which is slightly above the comparable company average of 15x. We believe that the company's innovation and transformation is in line with market expectations, so comparable companies that mainly focus on generic drugs should receive some valuation premiums.
Risk warning: 1) The company's profit decreased due to reduced procurement prices; 2) the market share declined due to the expiration of core drug patents; 3) the progress of new drug research and development fell short of expectations.