Introduction to this report:

Profitability is under pressure in the short term, capacity construction is increasing, internationalization continues to advance, optimistic about long-term growth space, and maintaining the rating of increasing holdings.

Key points of investment:

Maintain an increase in holdings rating. 2023 revenue of 2,376 billion yuan (+4.78%), net profit of 397 million yuan (-63.04%), of which laboratory services contributed net profit of 473 million yuan, fund management revenue contributed net profit of 131 million yuan, and net loss of 267 million yuan from changes in fair value of biological assets. The results were in line with expectations. Considering the competitive pressure on project prices and the impact of changes in the fair value of biological assets, the 2024-2025 EPS forecast was lowered to 0.66/0.77 yuan (originally 1.15/1.40 yuan), and the 2026 EPS forecast was added to 0.89 yuan. Referring to comparable company valuations, the 2024 PE 30X was given, and the target price was lowered to 19.83 yuan (previously 30.24 yuan), maintaining an increase in holdings rating.

Profitability is under pressure in the short term, and new orders are yet to be resumed. Non-clinical drug research revenue of 2.309 billion yuan (+4.31%), gross profit margin of 43.22% (-5.09pct); clinical service revenue 63.42 million yuan (+27.95%), gross profit margin 21.18% (-10.52pct); experimental model supply revenue of 4.06 million yuan (-15.41%), gross profit margin 36.06% (+10.39%). The overall pressure on profitability is mainly due to price competition pressure under the influence of the investment and financing environment. New orders of 2.3 billion yuan were signed in 2023. As of the end of 2023, orders in progress were 3.3 billion yuan. The number of new customers added in 2023 increased by about 30% year-on-year, and the number of newly signed projects continued to recover in the fourth quarter.

Production capacity construction has been increased, and internationalization is being promoted. The 20,000 m2 facility in the Suzhou Zhaoyan Phase II has been capped, and the 22,000 m2 supporting facility construction project is expected to be completed and put into use in 2024. The construction of the Guangzhou security assessment base is progressing in an orderly manner. Overseas business revenue in 2023 was 579 million yuan (+51.20%), overseas Biomere signed new orders of about 340 million yuan, and internationalization continues to advance.

Catalysts: Rapid release of new production capacity, new business expansion exceeding expectations, rapid growth in on-hand orders.

Risk warning: Innovative drug investment and financing fell short of expectations, and industry competition intensified.