2023 Earnings Exceed Expectations
The company's revenue in 2023 increased 21.2% year over year to 13.74 billion yuan (RMB, same below), slightly exceeding our expectations. Demand for intermediates and APIs in overseas markets rebounded markedly in 2023, and domestic market demand gradually picked up. The company's intermediates and APIs business revenue rose 44.9% and 23.7% year-on-year to 2.32 billion yuan and 6.40 billion yuan respectively. At the same time, the company's pharmaceutical business revenue increased 10.2% year-on-year to 5.02 billion yuan due to reasons such as the Animal Insurance business receiving more orders from its main customer Muyuan Co., Ltd. in the second half of the year. The company's gross margin increased from 43.8% to 46.1% due to rising prices of intermediates and API products. The company's sales expense ratio decreased from 14.7% in 2022 to 11.6%, resulting in a year-on-year increase of 70.9% in shareholders' net profit to about 2.70 billion yuan, exceeding expectations by 18.8%.
2024-26E revenue is expected to grow steadily
Considering that 2023 revenue slightly exceeded expectations, our 2024-25E revenue forecast was slightly increased by 0.05% and 2.5%, respectively. The 2023-26E revenue CAGR is expected to be 6.9%, based on: 1) With the gradual recovery of the business environment of domestic pharmaceutical companies, there is still room for improvement in the demand for intermediates and APIs. 2) Revenue from the insulin business will resume growth: As insulin collection began to be implemented in May 2022, the revenue of this business fell 4.9% year-on-year to 1.12 billion yuan in 2023, but we should note that the company's insulin sales increased rapidly after the price of collection was reduced. The impact of the reduction in collection prices has been fully reflected in the 2023 annual report. Starting in 2024, insulin business revenue will resume growth. We expect insulin business revenue 2023-26E CAGR to be 11.4%. 3) Animal insurance business revenue will continue to grow rapidly: Muyuan Co., Ltd. (002714 CH), the main customer of the company's animal insurance business, is a famous domestic pig breeding company. Orders received by the company from Muyuan Co., Ltd. have continued to increase in recent years, indicating that Muyuan Co., Ltd. recognizes the company's products, and we believe that the company is expected to receive more orders in the future. 4) There are a number of diabetes drugs in the company's R&D pipeline. According to the current R&D and marketing application process, the company expects that the diabetes indications of liraglutide, insulin, and simeglutide will be approved in 2024 and 25, respectively. If approved, it will bring new growth points to the company's revenue.
The target price was raised to HK$11.58, and the rating was raised to “buy”. We raised 2024-25E shareholders' net profit by 21.2% and 23.0%, respectively, taking into account the decline in the company's sales expenses ratio in 2023. We are still pricing at 7.0 times the 2024E PER price-earnings ratio. The target price was raised to HK$11.58, and the rating was raised to “buy”.
Risk warning: 1) Fluctuations in API prices may cause sales to fall short of expectations; 2) Competition in the insulin product market may intensify; 3) New drug development progress may be slower than expected