Core views

On March 27, the company released its 2023 annual report. The commercialization of MCV series products continued to advance, achieving rapid sales growth; the mRNA technology platform was recognized by international pharmaceutical companies, and overseas business continued to advance. The company was affected by multiple adverse factors in 2023, and the apparent loss increased. It is expected that the adverse effects will be cleared in 24. Combined with revenue growth and cost scale control, the overall loss is expected to narrow drastically. The company has a rich R&D pipeline, and a variety of products under development will usher in key points. Subsequent smooth progress will help the company grow in the long term, and the prospects for commercialization are promising.

occurrences

The company issued the 2023 annual results announcement, and the results were in line with expectations

On March 27, the company announced its 2023 annual results announcement, achieving: 1) main business revenue of 345 million yuan, a year-on-year decrease of 65.49%; 2) net profit to mother - 1,483 million yuan, a year-on-year increase of 63.04%; 3) net profit without return to mother - 1,611 billion yuan, an increase of 55.94% year-on-year. The performance was in line with expectations.

Brief review

Apparent losses increased in the short term. The MCV series, the main product, continued to expand in the fourth quarter of 2023. The company achieved main business revenue of 170 million yuan, a year-on-year decrease of 47.61%; net profit due to mother - 498 million yuan, an increase of 14.14% year on year; net profit after deducting non-return to mother - 532 million yuan, and loss increased 18.00% year on year. The company's revenue side experienced a sharp decline in 2023, which was lower than previously anticipated, mainly due to:

1) Demand in the COVID-19 vaccine market fell sharply year on year in 2023. The company's COVID-19 vaccine sales revenue was 37 million yuan, down 96.86% year on year. 2) The company calculated a reduction of 253 million yuan in related revenue based on actual and anticipated returns of the COVID-19 vaccine. Losses increased sharply year-on-year, mainly due to: 1) the sharp decline in revenue related to the COVID-19 vaccine; 2) the reduction in COVID-19 vaccine revenue; 3) due to low COVID-19 vaccine production and insufficient utilization of production capacity in related production lines, the company included fixed costs corresponding to this part of the redundant production capacity in operating costs; 4) the scale of asset impairment losses calculated in the current period; and 5) sales expenses increased year-on-year due to brain vaccine marketing activities.

The commercialization of the MCV series continues to advance, achieving rapid volume release. As the main products, the company's MCV2 and MCV4 products continued to carry out market entry and sales work in 2023, and commercialization progressed smoothly. The annual sales revenue of MCV series products was 562 million yuan, an increase of about 266.39% over the previous year, achieving rapid release. It is expected that in 2024, as promotion and entry in various regions continues to advance, the MCV series is expected to usher in further expansion, driving the company's revenue to grow rapidly. At the same time, MCV4 is currently undergoing clinical trials for children and adults aged 4 and above, and the target population is expected to expand further in the future.

The R&D pipeline is rich, and the long-term development trend is positive. After years of layout development, the company has gradually established a leading next-generation vaccine R&D and production technology platform, and has a rich R&D pipeline. The 13-valent pneumonia-conjugate vaccine PCV13i under development by the company has submitted a marketing application and was accepted in February 2024. The adsorbed tetanus vaccine has begun phase III clinical trials and completed the first patient enrollment; the infant component dTCP is in phase III clinical trials, and the adolescent and adult Tdcp is in phase I clinical trials; the recombinant pneumococcal protein vaccine PBPV has completed phase Ib clinical field work; the recombinant shingles vaccine initiated phase I clinical trials in Canada in November 2023 and completed the first patient enrollment; the recombinant polio vaccine initiated phase I clinical trials in Australia in January 2024 For example, the test subjects were enrolled in the group. A rich pipeline of ongoing research provides a strong impetus for the company's subsequent performance growth, which is conducive to future long-term development.

The mRNA technology platform has been recognized by international pharmaceutical companies, and overseas business continues to advance. The mRNA technology platform established by the company helps the company develop more competitive products and expand business areas. In August 2023, AstraZeneca AB (AstraZeneca) signed a “Product Supply Cooperation Framework Agreement” with the company. The cooperation will focus on using the company's mRNA production platform to support AstraZeneca's research and development of specific vaccines. The signing of this agreement indicates that the company's mRNA technology platform has been recognized by international pharmaceutical companies, which is conducive to the further expansion of the company's mRNA production platform. In terms of overseas business, the company uses the overseas entry experience accumulated in the early stages to continue to promote international business. The company signed a strategic cooperation agreement with Indonesian biopharmaceutical company Etana and will continue to strengthen localization cooperation for products such as tuberculosis vaccine and quadrivalent influenza conjugate vaccine in Indonesia. The wholly-owned subsidiary Cansino Hong Kong signed a “Share Subscription Agreement” with Solution in August 2023, which will help the company expand its customer base in Southeast Asia, promote R&D cooperation and commercialization, and bring synergy effects.

Factors related to the COVID-19 vaccine affect apparent gross profit. The annual asset impairment was approximately 983 million yuan (-84.19%) of the company's gross profit in 2023, with a gross profit margin of 27.37% (-32.38pp), mainly due to the decline in COVID-19 vaccine revenue, the return of COVID-19 vaccines to reduce revenue and costs, and the corresponding fixed costs of COVID-19 vaccine-related production capacity included in operating costs. Excluding revenue and costs from the COVID-19 vaccine and operating costs included in fixed costs, the company's gross profit in 2023 was 491 million yuan (-20.56%), and the gross profit margin was 80.47% (+20.72pct). The increase in gross margin was mainly due to the sharp increase in sales revenue of MCV series products in 2023 and higher gross margin.

In 2023, the company's sales expenses were 353 million yuan (+32.55%), management expenses were 286 million yuan (+6.55%), R&D expenses were 638 million yuan (-18.02%), and financial expenses were -56 million yuan (-69.52%). Excluding reduced revenue from COVID-19 vaccine returns, sales, management, R&D, and financial expenses were 57.91% (+32.14pct), 46.94% (+20.96pct), 104.54% (+29.32pct), and -9.23% (+8.63pct), respectively. Sales expenses increased dramatically, mainly due to the company increasing marketing activities to continue promoting influenza vaccine products; management and R&D expenses increased dramatically, mainly due to a sharp drop in revenue.

The company's net cash flow from operating activities in 2023 was 908 million yuan, compared to the same period last year - 1,851 million yuan, mainly due to a decrease in the company's cash payments for raw materials and a decrease in cash payments for clinical testing fees and other operating activities. In 2023, the company estimated impairment provisions for various assets of about 983 million yuan, including preparation for depreciation of 473 million yuan for inventory price reduction (mainly for COVID-19 vaccines in stock), impairment provision for return costs receivable of 0.69 million yuan, prepaid impairment provision of 63 million yuan, and long-term asset impairment provision of 363 million yuan (mainly for Shanghai Pharmaceutical Cansino's adenovirus vector vaccine production line, as well as testing, virus workshops and other facilities).

Also, the balance of accounts receivable due to the company's long-term account age increased, resulting in a credit impairment loss of 15 million yuan.

2024 outlook: The MCV series is accelerating, and losses are expected to narrow significantly. The outlook for 2024 is MCV series products. As the company's main product, MCV series products are being promoted and approved in various regions, channel construction is being completed, and the products are expected to usher in further volume, driving the company's non-COVID-19 vaccine revenue to grow rapidly. In 2023, the company's profit side was affected by factors such as a sharp drop in COVID-19 vaccine revenue, the reduction in returns, the inclusion of redundant production capacity in operating costs, and asset impairment. It is expected that this part of the impact will be drastically reduced in 24. Combined with revenue growth and cost scale control, the overall loss is expected to narrow drastically. The company has a rich R&D pipeline. In 2024, various products under development, such as PCV13i, DTCP for infants and children, and tetanus vaccine, will reach a critical point. Subsequent smooth progress will help the company grow for a long time, and commercialization prospects are promising.

Profit Forecasts and Investment Ratings

Without considering the COVID-19 vaccine profit forecast, we expect the company to achieve operating income of 909 million yuan, 1,323 million yuan and 1,408 million yuan respectively from 2024 to 2026, net profit to mother of -316 million yuan, 16 million yuan and 131 million yuan respectively. The loss in 2024 is expected to decrease by 78.71% year-on-year, and the forecast is to turn a loss into a profit in 2025, and 696.81% year-on-year increase in 2026, equivalent to EPS of -1.28 yuan/share, 0.07 yuan/share, and 0.53 yuan/share, respectively. The purchase rating is maintained by comprehensively considering the progress of the company's R&D pipeline and its commercialization value.

Risk analysis

1. Product sales fall short of expectations: The company's main product is the MCV series. If the sales progress in 2024 falls short of expectations, it will affect the company's future revenue and profit expectations, which in turn will affect the company's valuation.

2. Risk of product price fluctuations: Prices of listed products may fluctuate. If the price drops significantly, it will affect the company's revenue and profit expectations, which in turn affects valuation.

3. Product safety risk: Vaccines have certain safety risks due to their special biological characteristics. If a vaccine safety incident occurs, it will not only adversely affect the operation and production of the enterprise itself, but may also cause fluctuations in the vaccine industry.

4. The progress of new product marketing is lower than expected: The company currently has multiple vaccine research and development pipelines. If the progress of the new product launch falls short of expectations, it may affect the company's future revenue and profit expectations, causing the company to turn a loss into a profit and delay or even unable to reverse the loss, which in turn affects the company's valuation.