The company released its 2023 annual report. The company achieved operating income of 1,412 billion yuan in 2023, up 21.73% year on year; net profit to mother was 117 million yuan, up 39.71% year on year; non-net profit deducted from mother was 123 million yuan, up 124.62% year on year.

Looking at Q4 alone, the company achieved operating income of 410 million yuan, a year-on-year increase of 26.74%, net profit to mother of 0.26 million yuan, an increase of 74.98% year-on-year, and net profit after deducting non-return to mother of 0.28 million yuan, or -4.56 million yuan for the same period in 2022.

The company released its 2024 quarterly report. In the first quarter of 2024, the company achieved operating income of 213 million yuan, an increase of 10.34%; net profit to mother of 0.22 million yuan, an increase of 4.75%; and deducted non-net profit of 20 million yuan, a year-on-year decrease of 4.21%.

Opinion: Kailiwei achieved ultra-rapid growth throughout 2023, and subsequent volumes are expected to accelerate.

The year-on-year growth rate of 2023Q1-4 revenue in each quarter continued to accelerate. The core product Kailliwei's clinical demand was rigid and was less affected by macro-industry factors; the year-on-year growth rate of 2024Q1 has slowed. We think it comes from Jin Shuxi's inter-provincial alliance collection yet to be carried out, and channel inventory clean-up is ahead; combined with the Spring Festival holiday, Q1 is also generally low in revenue for all quarters of the year. On the profit side, the year-on-year growth rate of 2023Q1-4 is faster than revenue. 2024Q1 believes that the company has maintained key promotion at the grassroots level but has not yet been fully converted into sales. The growth rate has slowed down, but we expect the volume to accelerate quarterly in the future.

By product type, the company's chemical revenue increased 92.66% year on year in 2023, the core product Kailiwei achieved significant growth, and sales increased by more than 200% year on year. Ambrose's sales volume more than doubled, and Kane Probiotics sales increased steadily; revenue from biological products fell 12.68% year on year, mainly due to the impact of collection, and Kim Soo-hee's sales volume declined year on year. By treatment sector, revenue from the antiviral sector was 1,086 million yuan +21.25% year over year, revenue from the anti-pulmonary fibrosis sector was 144 million yuan +70.92% year over year, and revenue from the anti-inflammatory sector was 158 million yuan -0.13% year over year.

In terms of financial indicators, the company's overall gross profit margin in 2023 was 84.34%, down 2.95pp year on year, mainly due to slight pressure on biological product sales, gross profit decreased by 3.18pp; sales expenses ratio was 56.19%, down 5.53pp from 61.72% in the same period in 2022. The rapid increase in sales revenue had a scale effect, and the absolute amount increased 10.82% year on year; the R&D expense ratio in 2023 was 9.51%, down 0.34pp from 9.85% in the same period in 2022, and the absolute amount increased 17.52% year on year; 2023 The management expense ratio was 7.29%, down 4.54pp from 11.83% in the same period in 2022, the absolute amount decreased 24.99% year on year; operating cash flow decreased 5.55% year on year. The company performed well in various financial indicators.

A functional cure for long-term interferon hepatitis B will soon be declared, and the antiviral & immune pipeline continues to advance. Based on four major technology platforms, the company has developed multiple platforms around diseases such as viral hepatitis (hepatitis C/B), liver tumors, viral infections, and immunity. Highlights include the development of functional therapeutic drug combinations for hepatitis B with innovative drugs at the core, and independent development of local recombinant proteins, monoclonal antibodies, siRNA, etc. around various mechanisms such as antivirals, hepatitis B surface antigen suppression, and immune regulation. In 2023, the company invested a total of 173 million yuan in R&D, an increase of 12.45% over the previous year, accounting for 12.22% of revenue. Currently, interferon alpha-2 is being used in phase 3 clinical trial programs for chronic HBV infection in the low replication phase. We expect 24Q2-Q3 to be declared; the KW-045 project for pediatric herpetic angina and the KW-051 project to treat shingles are in phase 2 clinical, KW-059 is treating hepatic epithelioid hemangioendothelioma, and the new class 1 drug KW-027 is in phase 1 clinical trial.

Profit forecasting and investment advice. The company's innovative hepatitis C drug Kailiwei was renewed through national health insurance negotiations. Kailiwei's reimbursement indications were extended from gene non-type 1b to “gene type 1, 2, 3, and 6”, covering major domestic genotypes. The expansion of medical insurance indications has created strategic entry conditions for the product to increase its market share. With its dosage advantages and self-funded properties, the existing product Jin Shuxi can impact sales at the level of 1 billion dollars in further channel expansion; PEG long-acting interferon is expected to be launched in 2025, which will increase the company's revenue; and various other existing products provide stable support for the company's performance. Based on the current state of the company's operations, we lowered our profit forecast. Net profit due to mother for 2024-2026 is estimated to be 158 million yuan/209 million yuan/282 million yuan respectively, with year-on-year growth rates of 35.5%, 32.4%, and 34.8% respectively. Corresponding PE is 36X/27X/20X, respectively, maintaining the “buy” rating.

Risk warning: risk of sales falling short of expectations; risk of falling short of expectations in new drug development; risk of industry policy, etc.