Incident: The company announced its 2023 annual report. In 2023, it achieved operating income of 5.523 billion yuan (+1.44%), net profit of 1,033 million yuan (+12.17%), net profit of 1,024 million yuan (+10.46%); single Q4 achieved revenue of 947 million yuan (-11.71%), net profit of 66 million yuan (-62.64%), net profit of non-return to mother of 73 million yuan (-55.74%).

The raw materials business affected revenue growth throughout the year. CDMO maintained steady growth: annual revenue growth slowed further compared to Q3. By business sector, the API business was under pressure in the short term, and CDMO revenue maintained steady growth. In 2023, the APIs and CDMO achieved revenue of 12.61 billion yuan (-22.95%/+19.4%). The API business was mainly under pressure 1). Anti-infective products declined significantly, and competition mainly came from China; 2) Central nervous system products declined slightly due to market restructuring. Looking ahead to 2024, as the industry nears the end of inventory removal, the API business is expected to gradually recover steadily, and the CDMO business is expected to maintain steady growth as the project pipeline progresses and the investment and financing environment improves.

R&D investment continues to increase, and new businesses are developing rapidly: The company attaches importance to R&D investment, continuously improves the layout of the technology platform, and invested 377 million yuan (+12.32%) in R&D in 2023. In 2023, the company's new business developed rapidly. The 2023Q1 peptide GMP production line was put into use, and a strategic cooperation agreement was signed by the customer to complete the peptide GMP production. The small nucleic acid team already has the business capability to undertake small nucleic acid customization, pharmaceutical research and toxicological batch production, and has accelerated the construction of a small nucleic acid pilot platform and GMP commercial production workshop. ADC has expanded based on small molecule business and already has CMC service capabilities.

Expenses were stable during the period, and profitability continued to increase: in 2023, the sales/management/finance expense ratios were 1.48%/8.07%/-1.37% (+0.42/0.19/0.21pct), respectively, and expenses were relatively stable during the period. Profitability remained at a high level. The overall gross margin and net profit margin in 2023 were 37.66/ 18.67% (+3/1.76pct), respectively. By sector, the gross margin of APIs and CDMO in 2023 was 32.92%/40.34% (+2.43/0.65pct), respectively, and profitability continued to increase.

Investment advice: We expect the company to achieve operating income of 61.51/70.81/6.836 billion yuan and net profit to mother of 11.84/14.07/1,378 billion yuan in 2024-2026. The corresponding PE was 11.98/10.07/10.29 times, respectively, maintaining the “gain” rating for the company.

Risk warning: risk of life cycle changes and sales of innovative drugs falling short of expectations; decline in order prices due to increased industry competition; risk of geopolitical factors; risk of exchange gains and losses, etc.