Core views
The company announced its 2023 annual results. Revenue grew rapidly throughout the year, and profit side releases exceeded expectations. Intermediates and APIs are partially benefiting from the recovery in demand, and the price performance of major varieties is good; the formulation business is developing steadily, and the animal insurance sector is growing rapidly. Furthermore, the company maintains a high dividend payout ratio and continues to give back to investors. At present, the company's R&D and innovation are advancing at an accelerated pace, while actively laying out the field of synthetic biology. It is anticipated that the construction of many new production capacity in APIs and animal insurance will continue to promote industrial upgrading in 24 years, and that innovation progress will gradually be realized.
occurrences
The company released the 2023 annual results announcement and dividend payment announcement
On March 27, the company announced its 2023 annual results. In 2023, it achieved revenue of 13.740 billion yuan, an increase of 21.2% over the previous year; net profit to mother was 2,701 billion yuan, an increase of 70.9% over the previous year. In addition, the Board of Directors recommended a final dividend of RMB 28 per share and a special dividend of RMB 12 points per share, connecting an interim dividend of RMB 12 points per share, and a full year dividend of RMB 52 cents per share.
Brief review
Intermediate APIs are booming, and the animal insurance business continues to grow at a high rate
The company's revenue grew rapidly throughout the year, and its profit-side release exceeded expectations. It mainly benefited from rising prices of intermediate raw materials driven by a recovery in demand, steady growth in the formulation sector, and a nearly 50% increase in the health insurance business. The performance exceeded previous expectations, and the dividend payout ratio remained high.
Revenue grew rapidly, and profit side performed well. In 2023, the company's revenue was 13.740 billion yuan, up 21.2% year on year; net profit to mother was 2.701 billion yuan, up 70.9% year on year. The revenue side maintained rapid growth, the profit side released more than expected, and the performance was impressive. Judging from the business structure, the company's three current business revenue sources include intermediate products, APIs and pharmaceutical products. Foreign sales revenue from the intermediates business was 2,317 billion yuan, up 44.8% year on year; foreign sales revenue from the API business was 6.399 billion yuan, up 23.5% year on year; revenue from the formulation business was 5,024 billion yuan, up 10.2% year on year.
The recovery in demand is driving up the price of intermediate APIs. The good performance of the intermediates and APIs is mainly due to a recovery in demand represented by overseas markets, which has led to a steady rise in sales prices for the company's main API products (amoxicillin, ampicillin, etc.) and intermediate products (6-APA, penicillin industrial salt). In terms of prices, the prices of the company's main varieties have remained stable since entering 2024. At present, the company's upstream products have covered nearly 80 countries and regions around the world, serving more than 600 customers, and is in a leading position in the field of antibiotic raw materials. In November 2023, the company launched the construction of an API project in Gaolan Port of the Zhuhai Federation, which mainly involves three sterile cephalosporin API workshops, a sterile enzyme inhibitor workshop, a generic chemical drug workshop, and a series of supporting facilities. The construction of the project will further promote the upgrading of the company's industry.
The formulation business is developing steadily, and the animal insurance sector is growing rapidly. The company's pharmaceutical business revenue was 5,024 billion yuan, up 10.2% year on year, maintaining a steady development trend. Among them, revenue from diabetes products was 1,118 billion yuan, down 4.9% year on year; revenue from antibiotic products (including animal insurance products) was 3.533 billion yuan, up 15.3% year on year; revenue from animal insurance products was 1.18 billion yuan, up 48.1% year on year. Currently, the company's animal insurance base layout includes: 1) North China: Inner Mongolia Federal Animal Insurance, a wholly-owned subsidiary of the company, construction of a new plant base is progressing steadily; 2) Huazhong: Henan Lianmu Veterinary Pharmaceutical, was established in July 2022 by Inner Mongolia Federal Insurance and Muyuan Co., Ltd., and currently the base construction is progressing steadily, and the comprehensive and in-depth cooperation stage between the two sides is expected to continue to increase in the size of the company's animal insurance sector; 3) South China: Zhuhai Gaolan Port Animal Insurance production base, which will begin construction at the end of November 2023.
Gross margin and net margin continued to rise. The company's gross profit margin in 2023 was 46.1%, +2.3 pct year on year; net profit margin was 19.7%, +5.7 pct year on year; gross margin and net margin both showed a steady upward trend in recent years, mainly related to increased profit margins in the intermediates and APIs segment in terms of business drivers. By business structure, the profit margin of the intermediate business segment for the full year of 2023 was 34.5%, +13.2 pct year on year; the profit margin of the API business segment was 10.6%, +4.2 pct year on year; and the profit margin of the pharmaceutical business segment was 11.7%, -5.8 pct year on year. The increase in profit margins in the intermediates and APIs business segment is expected to benefit from the boom in antibiotic related varieties and good price performance; the profit margin of the formulation business segment is expected to fluctuate due to factors such as insulin collection.
Actively lay out synthetic biology. On January 22, 2024, Bayannaoer Economic and Technological Development Zone held a signing ceremony for the long-chain binary acid series project with Inner Mongolia Everbright Lianfeng Biotechnology Co., Ltd., a wholly-owned subsidiary of the company. The project plans to invest 1.1 billion yuan, covering a total area of 500 mu, and build related projects such as long chain binary acid, long chain nylon, and musk T in 3 phases. The production technology for long-chain binary acid, a synthetic biological variety, involves various fields such as microbial fermentation and biological extraction. The company has previously accumulated wealth in the fields of biological fermentation and biological manufacturing, and has mature production experience and technical teams in antibiotic intermediates, insulin, etc. This layout in the field of synthetic biology will further enrich the company's business areas, while also in line with the development direction encouraged by the national “14th Five-Year Plan” for bioeconomic development. Inner Mongolia's superior resources are expected to help reduce project production costs.
Future outlook: Looking ahead to 2024, 1) In terms of research and development, the company's Liraglutide injection marketing application was accepted in August 2023, and is expected to be launched within 2024; Simeglutide injection diabetes indications completed phase III clinical enrollment in July 2023, and phase III clinical trials are expected to end in 2024. If clinical progress is smooth, it is expected to be approved in 2025; 2) The company's animal insurance business has maintained a good development trend in recent years. The construction of the new Inner Mongolia Federal Animal Insurance Plant and Henan Lianmu Veterinary Drug Base is progressing steadily. Construction began at the end of 2023, and the new production capacity is expected to be gradually released within the next two years, driving the company's sports insurance sector's performance to continue to increase revenue; 3) Market prices for the company's main APIs and intermediate products have been basically stable since 2024. If the price trend remains stable throughout the year, the prosperity and profit level of the intermediates and APIs sector is expected to be maintained.
Profit forecasting
We forecast that in 2024-2026, the company's revenue will be 151.14 billion yuan, 16.4.59 billion yuan, and 17.907 billion yuan, respectively, up 10%, 8.9%, and 8.8% year on year; net profit to mother will be 28.9 billion yuan, 31.6 billion yuan, and 3.46 billion yuan, respectively, up 7%, 9.3% and 9.6% year on year, respectively. Equivalent EPS was 1.59 yuan/share, 1.74 yuan/share, and 1.91 yuan/share, respectively. The corresponding PE was 5.2X, 4.8X, and 4.3X, covered for the first time, and gave a “buy” rating.
Risk analysis
Risk of price fluctuations of major products: The company's three current business revenue sources include intermediate products, APIs and pharmaceutical products. Intermediate products mainly involve 6-APA and penicillin G potassium salt. API products are represented by amoxicillin, ampicillin, etc. Prices of related varieties have been rising in recent years. Significant price fluctuations in the future will affect the company's main business revenue growth.
Industry competition intensifies risks: Currently, the competitive pattern in the market where the company's main products are located is relatively stable. If prices rise further and more competitors join the market in the future, increased competition may reduce the company's profit level; in addition, if additional production capacity is supplied in international markets such as India, it may have an impact on the prices of the company's related varieties.
Variety risk: Currently, the country's centralized drug procurement and medical insurance negotiations are gradually being normalized. Currently, the company still has some varieties that have not been included in the collection. In the future, the price drop of related varieties after being collected may have a certain impact on the income of this variety.
Risk of changes in overseas demand: A certain percentage of the company's current products and future product sales are used for export. A decline in overseas demand will adversely affect the company's performance.
Risk of rising raw material costs: The company involves the entire process from intermediates and APIs to the formulation industry chain in the field of antibiotics. The main raw materials in the upstream fermentation process include large varieties such as corn and soybeans. Fluctuations in the prices of related raw materials will adversely affect the company's profit level.
The company's main business currently includes intermediates, APIs and pharmaceutical products. Among them, intermediates and APIs are mainly antibiotic related varieties. The revenue from intermediates and APIs in 2021-2023 accounted for 58.4%, 59.8% and 63.5% of total revenue, respectively. Assuming a decline in the popularity of antibiotic intermediates and APIs, corresponding to the 2024-2026 intermediate revenue reduction to 21.19, 20.07, and 1.913 billion yuan, and API revenue was lowered to 65.61, 68.72, and 7.24 billion yuan; then the company's overall revenue for 2024-2026 fell to 143.78, 155.11, and 16.813 billion yuan, respectively, compared with the current forecast. Net profit attributable to mother fell to $27.17, 29.43, and $3.201 billion, respectively, compared with current forecasts, down 6.0%, 6.9%, and 7.6%, respectively.