Incident: The company released its 2023 annual report. In 2023, it achieved operating income of 11.538 billion yuan (+12.39%), net profit to mother of 1,601 billion yuan (+16.48%), and net profit after deducting non-return to mother of 1,514 billion yuan (+6.51%).
The decline in investment and financing sentiment affects business performance such as laboratory services, and we are waiting for marginal improvements. By sector, the laboratory services business achieved operating revenue of 6.660 billion yuan (+9.38%). Compared with 23H1, the growth rate slowed significantly; gross margin was 44.28% (-1.25pct), which is expected to be affected by increased costs such as manpower, depreciation and amortization. We believe that the slowdown in the growth rate of the laboratory service business in the second half of 2023 was mainly affected by the phased decline in investment and financing in the global pharmaceutical industry. As the steady recovery in investment and financing drives a recovery in front-end R&D demand, we believe that the growth rate of the company's laboratory services business is expected to improve quarterly in 2024. The CMC business achieved revenue of 2,711 billion yuan (+12.64%) and gross margin of 33.68% (-1.11pct). In 2023, the company's CMC business continued to advance. Compared with 2022, the process verification & commercialization phase and clinical phase III projects increased by 14 and 3, respectively. With the increase in high-value-added late-stage projects and the gradual release of production capacity, it is expected that the CMC business revenue and profitability will continue to increase. The clinical research service business achieved revenue of 1,737 billion yuan (+24.66%) and a gross profit margin of 17.05% (+5.59pct). We believe that the increase in gross margin of the clinical research service business is mainly due to the increase in human efficiency in domestic clinical CRO, SMO and other business sectors. Macromolecule and cell and gene therapy services achieved operating revenue of 425 million yuan (+21.06%) and gross margin of -8.30%. The company continues to improve the service capacity and scope of this business, increasing production capacity layout, and is expected to maintain relatively rapid growth in the future.
Operating cash flow performance is good, and production capacity layout continues to advance. The net cash flow from the company's operating activities in 2023 was 2,754 billion yuan (+28.50%), which performed well. The company's CAPEX expenditure in 2023 was 2,865 billion yuan, which is still at an all-time high. At the end of 2023, the amount of projects under construction by the company was 2,632 billion yuan (+57.56%), mainly due to increased investment in biomedical R&D projects in Ningbo's second and third parks and Xi'an. The company's various production capacity layouts continued to advance, laying the foundation for long-term growth.
Profit forecasting and valuation. We expect the company's revenue in 2024-2026 to be 12.748 billion yuan, 14.755 billion yuan, and 16.995 billion yuan respectively, with year-on-year growth rates of 10.5%, 15.7%, and 15.2% respectively; net profit to mother will be 1,715 billion yuan, 2,069 billion yuan and 2,539 billion yuan respectively, with year-on-year growth rates of 7.1%, 20.7%, and 22.7%, respectively. Based on the closing price on April 10, the corresponding PE will be 20.7 times, 17.1 times, and 14.0 times, respectively, maintaining the “buy” rating.
Risk warning: The extent and progress of the recovery in investment and financing in the pharmaceutical industry falls short of expectations; geopolitical risks.