Incident: The company released its 2023 annual report. In 2023, the company achieved operating income of 2,376 million yuan, a year-on-year increase of 4.78%; net profit to mother of 397 million yuan, a year-on-year decrease of 63.05%; net profit after deducting non-return to mother of 338 million yuan, a year-on-year decrease of 66.89%; and operating cash flow of 623 million yuan, a year-on-year decrease of 35.86%.

Revenue continues to be steady, and the value of biological assets disrupts profits. On a quarterly basis, the company's 2023Q4 revenue was 789 million yuan (-20.39%), net profit of 49.61 million yuan (-88.78%), net profit after deducting non-return to mother of 26.48 million yuan (-93.60%). The revenue growth rate was higher than profit. We expect losses due to changes in the fair value of biological assets: about 267 million yuan in 2023. Furthermore, we expect the net profit of the laboratory service business reflecting the actual operation of the company to be about 473 million yuan, a year-on-year decrease of about 17.90%, mainly due to the decline in gross margin due to increased competition. In terms of orders, new orders were signed in 2023. As of the end of March 2024, there were about 3.3 billion yuan of on-hand orders. Overseas subsidiaries maintained stable operations in 2023, and new orders of about 340 million yuan were signed in 2023. In terms of profitability, the company's overall gross profit margin in 2023 was 42.62% (-5.28pp), and the net profit margin was 16.48% (-30.84pp). 2023 sales expense ratio 1.04% (+0.25pp), management fee rate 11.79% (-0.85pp). Finance rate -6.36% (+0.46pp), R&D expenditure rate 4.08% (+0.64pp).

Pre-clinical evaluation+clinical one-stop service continues to gain strength, and front-end collaboration is expected to drive long-term growth. 1) Pre-clinical evaluation service: Service capacity continues to expand, production capacity continues to expand: In 2023, the company continued to develop and optimize ophthalmic disease models, mental illness models, and myocardial infarction models, etc., and the construction of the 20,000 m2 facility in Suzhou Phase II has been capped. In addition, Suzhou has begun construction projects for 22,000 m2 of supporting facilities, which support various operational requirements. They are expected to be completed and gradually put into use in 2024. We expect that with the continuous release of new production capacity, ongoing orders are expected to be fulfilled quickly; 2) Clinical CRO: The entire industry chain layout is gradually being perfected, which is expected to gradually contribute to additional volume: most of the company's clinical service sector projects have transitioned from front-end non-clinical research, and truly achieved seamless connection, improving the one-time pass rate of the review, reducing customer costs, and improving customer satisfaction. With the gradual strengthening of front-end and back-end collaboration, the company can be expected to grow in the long term.

Profit forecast and investment advice: Considering that the company's orders continue to be steady, the profit side is due to fluctuations in biological asset values caused by non-human primate prices, we adjusted the profit forecast. We expect the company's revenue to 2024-2026 to be 24.13, 26.73, and 3.082 billion yuan (about 36.87 billion yuan and 4.585 billion yuan before the adjustment), up 1.55%, 10.74%, and 15.30% year-on-year. We expect net profit from 2024-2026 to the mother of 4.06, 5.02, and 630 million yuan (before adjustment) 2024-2025 is about 1,013 billion yuan, 1,348 million yuan), up 2.32%, 23.69%, and 25.29% year-on-year, corresponding to the 2024-2026 PE valuation of about 33.27, 26.89, and 21.47 times. The company is in a leading position in the domestic preclinical CRO field. In the future, it is expected to bring long-term growth and maintain a “buy” rating by expanding overseas markets and vertical expansion of the industrial chain.

Risk warning events: The public data used in the research report may have the risk of information being delayed or not updated in a timely manner, the risk of production capacity upgrades falling short of expectations, the risk of losing core technical personnel, the risk of rising raw material supply and prices, the risk of falling gross margin, the risk of falling short of expectations after Biomere's acquisition, and the risk of exchange rate fluctuations.