Key points of investment

We are optimistic about the high global demand for weight loss drug R&D and production, leading to high revenue growth for peptide APIs such as simeglutide and liraglutide, further driving the rapid growth of independent choice business. The CDMO business continues to expand the number of new customers and projects under the impetus of BD, and is expected to maintain steady growth, and the oligonucleotide business will contribute flexibly.

Financial performance: High revenue and profit growth in 2023

The company released its 2023 annual report. In 2023, it achieved revenue of 1,034 million yuan (YOY 58.69%), net profit to mother of 163 million yuan (YOY 26.20%), and net profit of 168 million yuan (YOY 102.31%) after deducting non-return to mother net profit of 168 million yuan (YOY 102.31%). The company plans to distribute cash dividends of RMB 4 (tax included) for every 10 shares to all shareholders. A total cash dividend of 85,273,500 yuan (tax included) was distributed, and the dividend ratio reached 52.34%.

Looking at a single quarter, 2023Q4 achieved revenue of 324 million yuan (20.45%), net profit attributable to mother of 71 million yuan (YOY -6.18%), and net profit after deducting non-return to mother of 80 million yuan (YOY 12.20%).

Growth capacity: Independent business growth. Looking ahead to high growth and continued splitting under a rich order structure, the company achieved revenue of 629 million yuan (YOY 145.48%) in 2023, achieving rapid growth, and the customized business achieved revenue of 404 million yuan (YOY 3.07%), which is rising steadily.

Independent choice of business: orders are plentiful, production capacity is verified. ① Registration: In October and December 2023, Nootech received the First Adequate Letter for liraglutide and simeglutide ingredients issued by the US FDA. By the end of 2023, the company had obtained US DMF/VMF numbers for 12 drug ingredients.

② Order: According to the annual report, in 2023, the company “signed a GLP-1 innovative drug ingredient CDMO cooperation with a well-known domestic biomedical company and agreed on a tiered supply price of the API after the customer's terminal preparation is approved for domestic marketing”; “signed a European regional strategic cooperation agreement with the customer for simeglutide injections”; and “signed a Latin American regional strategic cooperation agreement with the customer for oral simeglutide APIs”. ③ Production capacity & capacity: According to the company's annual report, “The company's production capacity of peptide APIs has now reached tonnage scale”, “The production capacity of peptide APIs is expected to reach several tons by the end of 2025”, and “the single batch production of many long-chain modified peptide APIs such as simeglutide has reached more than 10 kg”. ④ Research projects: The company has a total of 37 research projects, including 21 API projects and 16 formulation projects.

C (D) MO business: According to the company's major contract announcement in May 2023, the total contract amount reached US$102 million. “The company will deliver certified products in 2024”. The purchase amount is expected to reach 5.76 million US dollars in 2024. With large orders and the cooperation of new customers, we are optimistic about the certainty of the company's CDMO business growth.

Looking ahead to 2024: We are optimistic that weight loss R&D & production will bring high demand for simeglutide and liraglutide APIs, which is expected to support the rapid growth of independent choice businesses; the CDMO business continues to expand with new customers & projects under the influence of BD, and is expected to maintain steady growth, and the oligonucleotide business will contribute flexibly.

Profitability: The share of high-margin self-selected businesses increased, driving the increase in profitability. In 2023, the company's gross profit margin was 60.97%, an increase of 3.4 pcts year-on-year. We believe that the increase in gross margin was mainly due to an increase in the share of high-margin independent choice businesses (64.43% gross profit margin, 2023 revenue share 60.84%, revenue share increased 21.51 pcts year over year). In 2023, the company's net sales margin was 16.01%, down 2.84pct year on year; net profit margin after deduction was 16.26%, up 3.5pct year on year. Looking at the cost ratio, the sales expense ratio increased by 0.21 pct year on year, the management expense ratio decreased by 2.72 pct year on year, the R&D cost ratio increased by 1.41 pct year on year, and the financial cost ratio increased by 1.15 pct year on year.

2023Q4, the company's gross profit margin was 61.59%, a year-on-year decrease of 1.39pct. We think it was mainly due to changes in product structure. The net sales margin was 23.18%, down 4.37 pct year on year; looking at the cost ratio, the sales expense ratio increased 0.62 pct year on year, the management expense ratio increased 4.64 pct year on year, the R&D cost rate increased 4.77 pct year on year, and the financial expense ratio decreased 0.88 pct year on year.

Looking ahead to 2024: As the self-selected business continues to grow rapidly, we expect gross margin to continue to rise. Amortization of equity incentives, interest expenses on convertible bonds may cause some fluctuations in management expenses and financial expenses, but overall, we think the net interest rate level is still expected to rise.

Operating efficiency: Increased turnover ratio, optimistic about continuous improvement in operating quality. In terms of operating capacity, the company's fixed asset turnover ratio was 1.03 times in 2023, up 0.89 times compared with 2022; the accounts receivable turnover ratio was 3.82 times, up 3.38 times in 2022; and the inventory turnover ratio was 1.15 times, up 0.96 times from 2022. In terms of cash flow, the net cash flow from the company's operating activities increased sharply by 1095.59% year on year in 2023, mainly due to a sharp increase in customer repayments, and I am optimistic that the company's operating quality will continue 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 1.09, 1.57, and 2.27 yuan/share, respectively. The closing price on April 11, 2024 corresponds to 46 times the 2024 PE. We are optimistic that the R&D and production of weight loss drugs will bring high demand for simeglutide and liraglutide APIs, which is expected to support the rapid growth of independent selection business; the CDMO business continues to expand in the number of new customers & projects under BD, and is expected to maintain steady growth, and the oligonucleotide business is expected to contribute to elasticity and maintain an “increase” rating.

Risk warning

Risk of order delivery volatility, risk of loss of CDMO customers and orders, risk of product release falling short of expectations, risk of product development failure, etc.