Incident: The company released its 2023 annual report and achieved revenue of 7.38 billion yuan (+4.2%); net profit of 2.03 billion yuan (+0.9%); and non-net profit of 1.48 billion yuan (-4.1%) deducted from mother in 2023.
Short-term profits were slightly disrupted, and the main business continued to show strong resilience. By business, 1) Clinical trial technical service revenue was 4.17 billion yuan (+1%), achieving gross profit of 1.59 billion yuan (+2.6%), and gross margin of 38.2% (+0.6pp), mainly due to improved work efficiency, reduced vaccine programs, and lower handling costs for suppliers. As of December 31, 2023, the company's ongoing pharmacological clinical research projects increased from 680 on December 31, 2022 to 752, including 330 clinical phase I (including pharmacokinetic studies) projects, 136 clinical phase II projects, 171 clinical phase III projects, 31 clinical phase IV projects, and 84 other projects (mainly including researcher-initiated research and real-world research). 2) Revenue from clinical trial-related services and laboratory services was $3.12 billion (+8.5%), with gross profit of $1.19 billion, which was basically the same as the previous year. The gross margin was 38.2% (-3.6pp), mainly due to the slowdown in revenue growth of Fangda Holdings and the reduction in gross margin, as well as the rapid growth rate of the field management and recruitment service business with low gross margin.
Overseas business continues to expand, and integrated service capabilities continue to increase. Clinical trial service revenue and in-hand orders in the US increased significantly in 2023, covering oncology, vaccines, ophthalmology, central nervous system, devices, etc.; Fangda Pharma US Laboratories completed the acquisition of Nucro-Technics Holdings, Inc. and its subsidiary Nucro-Technics, Inc., to expand the laboratory to improve analytical chemistry, microbiology, toxicology, bioanalysis and sample storage and stability testing services; the European team completed Marti Farm and Rome in Croatia Nea Opera's business and system are integrated to form an integrated clinical operation service platform, further strengthening the company's service capabilities and scale in Europe and the United States, and jointly serving global customers; in addition, a new 8,000-square-meter clinical sample production center located in Suzhou was put into operation.
The steady increase in on-hand orders showed a recovery trend. In 2023, the company added a net contract amount of 7.85 billion yuan (-18.8%). We expect this is mainly due to cancellation of some customer orders and contract changes in 2023Q4, and a sharp year-on-year decrease in handling fees for new orders. The North American market achieved rapid growth in new orders and business in 2023. By the end of 2023, the company had a total contract amount of 14.08 billion yuan (+2.1%) to be executed.
Profit forecasting and investment advice. We estimate that the company's net profit for 2024-2026 will be 2.25 billion yuan, 2.69 billion yuan, and 3.23 billion yuan, respectively, and EPS will be 2.58 yuan, 3.09 yuan, and 3.71 yuan, respectively. The 2024 25X PE will be given a corresponding target price of 64.5 yuan, giving it a “buy” rating.
Risk warning: Risks such as a decline or fluctuation in the number of orders, falling short of expectations in production capacity, falling short of expectations in business development, and fluctuations in fair value.