Key points of investment

The company's anesthetic products will maintain a high growth rate in 2023. We are optimistic about the company's central nervous system products & follow-up pipeline layout and competitiveness. The impact of stock collection is declining, and high barriers to generic/innovative drugs are being launched one after another, supporting rapid revenue and profit growth.

Financial performance: rapid growth in revenue and net profit throughout the year

On March 30, 2024, the company released its 2023 annual report. Revenue for 2023 was 5.042 billion yuan, up 17.28% year on year; net profit to mother was 1,037 million yuan, up 15.12% year on year; net profit after deducting non-return to mother was 1,013 million yuan, up 16.11% year on year.

Looking at a single quarter, 2023Q4's revenue was 1,386 million yuan, up 17.58% year on year; net profit to mother was 151 million yuan, down 4.76% year on year, and net profit after deducting non-return to mother was 127 million yuan, down 0.42% year on year.

Growth capacity: Anesthetics maintained a relatively rapid growth rate, optimistic about the release of new products. In 2023, the pharmaceutical industry achieved revenue of 4.220 billion yuan, YOY 14.85%, of which revenue from narcotic products was 2.702 billion yuan (YOY 24.29%), revenue from psychotropic products was 1,092 billion yuan (YOY 3.74%), revenue from neurological products was 127 million yuan (YOY -32.22%), revenue from other formulations was 154 million yuan (YOY 7.13%), and API business revenue of 146 million yuan (YOY 7.13%) ( (YOY 23.97%); commercial pharmaceuticals achieved revenue of 709 million yuan, YOY 37.25%.

Looking at growth drivers: The company's anesthetic products maintained a relatively rapid growth rate in 2023, and the revenue share increased from 50.58% in 2022 to 53.60% in 2023. Anesthetics are the company's core revenue source, and the core products midazolam injections and etomidate injections are expected to continue to maintain a steady growth trend; “Hydroxyreshua” (oxycodone, remifentanil, sufentanil, and aventanyl) are the four major new varieties of the company's anesthesia line. They have large market space, a good competitive landscape, and the potential to become a major single product. We expect rapid release and maintenance of high growth as the company's products accelerate entry into hospitals and product promotion. Furthermore, TRV130 was approved in 2023 and included in the national health insurance catalogue, which is expected to support the company's continued upward performance in the medium to long term.

The year-on-year decline in revenue from neurological products in 2023 is expected to be mainly affected by product price reductions; in addition, in February 2024, the company announced that Teva Antitan received exclusive commercial rights in mainland China and agreed “to complete total sales of about RMB 2-2.5 billion for TEVA licensed products during 2024-2028”, which is expected to further enrich the company's neurological product line and support the rapid growth of the company's neurological product revenue.

In terms of pipeline promotion, innovative drug projects: According to the company's annual report, it is expected that 3-5 new innovative drug projects will be established in 2024, 3 clinical applications will be submitted (NH140068 tablets, NH160030 tablets, and NH203 emulsion injections), and clinical trials of 8 new drugs (NH600001 emulsion injections, NH300231 enteric tablets, NH102 tablets, NH130 tablets, Protollin nasal spray, NHL35700 YH1910-Z01 YH1910-Z02 injection); generic drug projects: It is expected that 5-8 new generic drug projects will be established in 2024, and 4 varieties will be approved for marketing. I am optimistic that the product echelon will gradually be enriched and driven by innovation at an accelerated pace.

Looking ahead to 2024: According to the company's 2023 annual report, “It is expected that business revenue, total profit, and net profit will all maintain a 15% increase in 2024 compared to the data after the 2023 audit,” we are optimistic about the company's central nervous system product & follow-up pipeline layout and competitiveness. The impact of stock preparation collection is declining, and high-barrier generic/innovative drugs are being launched one after another, supporting steady growth in revenue and profits.

Profitability: Gross margin declined but net margin remained stable throughout the year

The gross profit margin in 2023 was 72.83%, a year-on-year decrease of 3.43pct. Looking at the specific business, the company's gross margins for anesthetics (-1.81pct), psychiatry (-6.07pct), neurological (-8.67pct), and APIs (-9.55pct) all declined, leading to a decline in comprehensive gross margin. In 2023, the company's net sales interest rate was 20.51%, up 0.03 pct year on year, and was basically stable. Looking at the cost ratio: the sales expense ratio decreased 4.05 pct year on year, the management expense ratio decreased 0.37 pct year on year, the R&D expense ratio increased 0.33 pct year on year (R&D expenses accounted for 13.02% of industrial revenue, up 0.66 pct year on year), and the financial expenses ratio increased 0.1 pct year on year.

Looking at a single quarter, the 2023Q4 gross profit margin was 72.09%, down 3.73 pcts year on year, and the net sales margin was 10.89%, down 1.38 pcts year on year. Looking at the cost ratio: the sales expense ratio decreased by 2.48 pct year on year, the management expense ratio decreased by 0.62 pct year on year, the R&D cost ratio decreased by 1.96 pct year on year, and the financial cost ratio increased by 0.61 pct year on year.

Looking ahead to 2024: We expect the overall gross margin to increase slightly as new high-margin anesthetic products continue to be released. In terms of cost ratio: As R&D projects progress, the R&D cost rate may increase slightly; the sales cost rate may increase slightly with the promotion of new products; the management cost ratio is expected to stabilize, and the overall net interest rate may increase slightly.

Operating efficiency: Inventory turnover is accelerating, and operating cash flow continues to improve. Judging from operating capacity, the company's accounts receivable turnover ratio in 2023 was 5.43, down from 5.74 in 2022; the inventory turnover ratio was 2.04, up from 1.55 in 2022. In terms of cash flow, net cash flow from the company's operating activities increased 17.10% year-on-year in 2023, and operating cash flow continued to improve.

Profit forecasting and valuation

Based on the company's latest annual report and operating conditions, we expect the company's 2024-2026 EPS to be 1.24, 1.48, and 1.75 yuan/share, respectively. The closing price on April 9, 2024 corresponds to 18 times the 2024 PE. We are optimistic about the company's central nervous system product & follow-up pipeline layout and competitiveness. The impact of stock preparation collection is declining, and high-barrier generic/innovative drugs are being launched one after another, supporting steady growth in revenue and profits, and maintaining a “buy” rating.

Risk warning

Risk of losing bids/price reduction in collection; risk of product sales and promotion falling short of expectations; risk of product development and registration progress falling short of expectations, etc.