Profitability increased throughout the year, and Q4 was under pressure in the short term

On April 8, the company announced its full-year results for 2023: achieved revenue/net profit to mother/ net profit of $55.23/10.33/ 10.24 billion yuan in 2023 (+1.44/12.17/ 10.46% yoy); 4Q23 realized revenue/net profit/net profit deducted from non-net profit of 947/0.66/ 0.73 billion yuan (-12/-63/ -56% yoy). The growth rate was affected by the decline in revenue and profit from the API business. We estimate the continued growth of the company's CDMO and the increase in new business releases. We estimate that the company's net profit for 2024-2026E will be 12.33/14.61 billion yuan (+19.3/18.5/ 0.5% yoy), corresponding EPS of 1.37/1.62/1.63 yuan. Using the SOTP method, CDMO and API 2024 PE 18.19x and 14.74x (both are the same as comparable companies) will be given a target price of 24.33 yuan to maintain the purchase rating.

CDMO: Commercial projects are growing rapidly, and the project pipeline funnel continues to expand. We estimate that the steady growth of the company's CDMO business is expected to continue: 1) Steady cardiovascular growth: 2023 revenue of 2,050 billion yuan (+6% yoy), of which downstream Entresto continued to grow rapidly, driven by demand, and achieved sales of 6 billion US dollars (+30% yoy) in 2023. 2) Strong momentum in the anti-tumor category: Revenue of $1,035 million (+60% yoy) in 2023, with downstream Kisqali patients gradually gaining recognition for their survival benefits, achieving sales of US$2.1 billion (+69% yoy) in 2023. 3) Steady expansion of the project pipeline: By the end of 2023, the company had undertaken 32/74/902 marketed/phase III clinical/phase I and phase II clinical projects, an increase of 3/8/63 compared to 1H23. 4) New production capacity was put into operation one after another: By the end of 2023, the company's fixed assets/projects under construction were 2.5/1.1 billion yuan respectively, an increase of 9/ 40% over the previous year. The first phase of the Ruibo Taizhou project (1500+ cubic meters) is expected to be put into operation in 2Q24; the second phase of the Ruibo US pilot plant is under construction.

New business: Formulations, peptides and conjugated drug platforms nurture new business capacity building and project expansion. Initial results: 1) Formulations: Ruihua Zhongshan completed delivery at 3M23; in 2023, the company provided services for more than 70 formulation projects for more than 40 customers; 2) Peptides: peptide GMP production lines were put into use in 1Q23; in 2023, the company completed the synthesis and delivery of dozens of peptides, including delivery of 10 million grade IND projects; 3) Conjugated drugs: OEB5 grade GMP production lines have been put into use in 2023; Conjugated pharmaceutical compound preparation delivery work.

The upward trend in gross margin continues, and cost ratios are disrupted in the short term

In 2023, the company's overall gross margin increased to 38% (+3 pct year over year), mainly due to: 1) the high-margin business CDMO's revenue share was +11 pct year over year; 2) CDMO and API gross margin both increased steadily.

In 2023, the company's sales/management/ R&D expenses increased to 1.48/8.07/ 5.99% (1.06/7.88/ 5.28% in 2022) due to depreciation and amortization, etc., and we expect 2024 to return to the historical average. In 2023, the company's API revenue growth was under pressure. Among them, anti-infectious/central nervous system/non-steroid/hypoglycemic API revenue was -44/ -17/+5/ -19% yoy, respectively.

Risk warning: The progress of downstream formulation releases fell short of expectations; the production transfer progress of overseas commercialized varieties fell short of expectations; the increase in the number of early projects fell short of expectations.