Key points of investment

Excluding the anti-epidemic product base, the main business continues to grow rapidly, and I am optimistic that internationalization and innovation will continue to be realized.

Performance: Excluding the anti-epidemic product base, the 2023 revenue continued to be stable. The company disclosed the 2023 performance: achieved revenue of 41.4 billion yuan (YOY -5.81%) in 2023, net profit of 2,386 billion yuan (YOY -36.04%), and deducted non-net profit of 2,011 billion yuan (YOY -48.08%). The decline in revenue was mainly due to the sharp year-on-year decline in revenue from COVID-related products (including fuhexidine (mRNA COVID-19 vaccine), zebepan (azvudine tablets), COVID-19 antigens and nucleic acid detection reagents, etc.). Excluding COVID-related products, revenue increased by about 12.43% year-on-year in 2023. Among them, revenue from key products such as Hans form, injectable trastuzumab, and Sukexin maintained rapid growth.

The sharp year-on-year decrease in net profit was mainly due to: ① the disposal of COVID-related products and assets and the corresponding reduction in profits due to a sharp decline in revenue from COVID-related products; ② financial expenses increased by 337 million yuan year-on-year due to factors such as interest rate hikes and appreciation of the US dollar and changes in the size of interest-bearing liabilities; ③ year-on-year increase in management expenses of the same caliber, excluding the impact of new M&A companies; ④ Net profit decreased year-on-year due to the impact of Cenexi, a new merger and acquisition subsidiary of Gland Pharma.

Business spin-off: continuous drive of innovative drug release, service loss reduction

Pharmaceuticals: Innovation and transformation continue to materialize, and continue to be optimistic. Revenue of $30.222 billion (YOY -1.91%) was achieved in 2023. Excluding COVID-related products, the pharmaceutical business revenue increased 13.50% year-on-year. Among them, Hans achieved revenue of 1,120 million yuan (YOY 230.20%), injectable trastuzumab achieved revenue of 2,749 million yuan (YOY 58.19%), and Su Kexin achieved revenue of 922 million yuan (YOY 19.67%).

Medical device and medical diagnosis business: Anti-epidemic base disrupted revenue YOY decline. In 2023, the medical device and medical diagnosis business achieved revenue of 4.39 billion yuan (YOY -36.83%), mainly due to a significant decline in revenue from COVID-19 antigens, nucleic acid detection reagents, and overseas sales revenue of non-proprietary COVID-19 products; excluding COVID-related products, the same caliber increased by 3.92%. Sisram achieved operating revenue of US$359 million and net profit of US$33 million (according to Sisram's financial statements in local currency), with year-on-year changes of 1.41% and -17.50%, respectively. The associated company Intuitive Fosun's “Leonardo da Vinci Surgical Robot” has installed a total of 55 units in China and Hong Kong, China, and achieved localized production.

Healthcare services: Continued loss reduction. The healthcare service business achieved operating income of 6.672 billion yuan (YOY 9.74%); realized segmental profit of -404 billion yuan, a year-on-year reduction of loss of 352 million yuan. The main reason for the year-on-year loss reduction was greater focus on online business, optimized expenses, and cost reduction benefits from centralized procurement of pharmaceutical devices.

Outlook: Optimistic about the continued advancement of internationalization & innovation

Continued high investment in R&D: In 2023, the company invested a total of 5.937 billion yuan in R&D, an increase of 0.88% over the previous year; of these, R&D expenses were 4.346 billion yuan, an increase of 1.02% over the previous year. The pharmaceutical business invested 5.172 billion yuan in R&D, an increase of 1.47% over the previous year. The pharmaceutical business R&D investment accounted for 17.11% of the pharmaceutical business revenue. We are optimistic that as the company continues to invest heavily in R&D, the share of revenue from innovative pharmaceutical products will continue to increase. The HER ADC drugs FS-1502 and ET-26 (injectable methoxyetomide hydrochloride) are used to induce general anesthesia in adults, and the MEK1/2 selective inhibitor FCN-159 are all in phase III clinical trials. DaxibotulinumToxina botulinum toxin and tenapanol hydrochloride tablets are in the NDA stage, and innovative drug pipelines continue to be rich, and commercialization continues to be realized.

Internationalization continues to advance and has already entered the implementation stage. In 2023, slulizumab injection (PD-1 inhibitor) was approved for marketing in overseas markets for the first time. It was approved in Indonesia to treat ES-SCLC and completed the first batch of overseas shipments in January 2024. It is the first domestically produced PD-1 monoclonal antibody approved for marketing in Southeast Asian countries. Furthermore, its marketing license application (MAA) in the European Union has also been accepted. Multiple clinical trials of Hans form and related combination therapies are being carried out in an orderly manner around the world, covering indications such as lung cancer, esophageal cancer, head and neck squamous cancer, colorectal cancer, and gastric cancer. Among them, a head-to-head bridging trial initiated in the US compared to the first-line standard treatment for extensive small cell lung cancer (ES-SCLC) is already in the clinical enrollment stage, and an international multi-center phase III clinical study for limited-stage small cell lung cancer (LS-SCLC) has also completed the first patient administration in China, the United States, Australia, and the European Union. Furthermore, with its excellent product strength, slulizumab injection (PD-1 inhibitor) has been certified as an orphan drug by the US FDA and the European Commission (European Commission) successively for the treatment of small cell lung cancer (SCLC). We are optimistic that the company will become one of the few domestic pharmaceutical companies with the ability to commercialize innovative drugs internationally, and we are also optimistic about the company's international implementation.

Profit forecasting and valuation

Considering that the impact of the company's 2023 COVID-related products and asset impairment, dollar interest rate hikes, etc. on financial expenses exceeded our previous expectations, which exceeded our previous expectations, we lowered the company's profit forecast for 2023-2025. At the same time, considering the base of the company's three major business segments and the continuity of business growth, we also slightly lowered revenue for 2024-2025. We expect the company's EPS in 2024-2026 to be 1.19, 1.50, and 1.74 yuan (the previous forecast values for 2024-2025 were 1.95 and 2.34 yuan), and the closing price on April 8, 2024 corresponds to 19 times the 2024 PE (corresponding to 2025 PE 15 times), maintaining the “buy” rating.

Risk warning

The review progress falls short of expectations; product sales fall short of expectations; market competition risk; risk of clinical results falling short of expectations; policy risk.