The 2023 results fell short of our expectations: the company released an annual report, and achieved revenue of 7.384 billion yuan in 2023, an increase of 4% year on year; realized net profit to mother of 2,025 billion yuan, an increase of 1% year on year. The 2023 results fell short of our expectations, mainly due to reduced demand from the COVID-19 business and downstream markets. Among them, 4Q23 achieved operating income of 1,734 billion yuan, an increase of 3% year on year; net profit to mother was 122 million yuan, a decrease of 76% year on year. Net profit due to a sharp year-on-year decline in 4Q23, mainly due to: 1) The gross margin fell 3.46 ppts year over year to 32.8%. 2) Net loss of 358 million yuan due to large fair value changes (net income of 133 million yuan in 4Q22). Gross margin decreased by 1.15 ppts to 38.18% year on year in 2023, mainly due to declining gross margin of Fangda Laboratories, increased revenue share of the low gross margin SMO business, and increased competition.
The digital systems and SMO business maintained steady growth, and accelerated the expansion of medical devices, pharmacovigilance, clinical translation and other businesses: revenue from clinical trial technical services was 4.168 billion yuan, an increase of 1% over the previous year. The number of drug clinical programs increased from 680 at the end of 2022 to 752 by the end of 2023. By the end of 2023, the company was working on 465 medical device and IVD projects (432 at the end of 2022), and related business revenue growth was significant. Pharmacovigilance team building has continued to be strengthened, 152 new research projects have been added, and 134 new customers have been added. The medical translation business added 86 new clients. Revenue from clinical trial-related services and laboratory services was $3.120 billion, an increase of 9% over the previous year. The company's digital systems business received more customers, and the number of global customers increased 31% year over year to 340 in 2023. As of the end of 2023, there were 826 ongoing projects. By the end of 2023, the company's ongoing field management (SMO) projects had increased to 1,952 (not 1,621 at the end of 2022). In 2023, Fangda Pharma US Laboratories completed the acquisition of Nucro Technics and expanded its laboratory by nearly 6,000 square meters. As of the end of the reporting period, the number of laboratory service projects in progress was 4,411.
The impact of COVID-19 related business is gradually clear: By region, the company's domestic main revenue was 4.163 billion yuan, an increase of 18% over the previous year, continuing to benefit from the company's market leadership position. Overseas main revenue was 3.127 billion yuan, a year-on-year decrease of 10%, mainly due to the year-on-year decrease in revenue from some COVID-19 vaccines. In 2023, the net increase in contract amount was 7.85 billion yuan, a decrease of 19% over the previous year.
The main reasons for the decline are: 1) Order cancellations and contract changes for some customers in 4Q23. 2. Handling fees for new orders dropped significantly year over year. By the end of 2023, the total amount of contracts to be executed by the company was 14.08 billion yuan, an increase of 2% over the previous year; the number of employees worldwide was 9,701, an increase of 468 over the previous year. The number of single-regional clinical trials outside the company increased from 188 at the end of 2022 to 194 at the end of 2023, and international multi-center clinical trials (MRCT) declined from 62 at the end of 2022 to 59 at the end of 2023, mainly due to the cancellation of some COVID-19 vaccine programs.
Maintain purchases and lower the DCF target price to 71.03 yuan: the corresponding 2024 P/E is 28x, which is 16x higher than the average value of comparable companies in the industry. We believe that Tiger Pharmaceuticals, as the leading clinical CRO leader in China, should receive a valuation premium.
Risk warning: 1) CRO industry growth falls short of expectations; 2) human resources restrictions; 3) investment returns fall short of expectations; 4) acquisition company growth falls short of expectations.