Incident: The company released its 2023 annual report. In 2023, the company achieved revenue of 1,044 million yuan (+23.91%), net profit of 261 million yuan (-0.86%), net profit of 239 million yuan (+52.21%), operating cash flow of 299 million yuan (+100.43%); 2023Q4 achieved operating income of 336 million yuan (+38.28%), net profit of 88 million yuan (+121.68%), net profit of 85 million yuan (+137.24%) .

The full-year 2023 results exceeded expectations, and the market share further increased. In 2023, the company's in-house market expansion and international market development achieved outstanding results, and the annual performance reached a record high. ① Domestic: In 2023, the company's sales (classified by business management, not by region) achieved revenue of 785 million yuan (+23.65%), and in-hospital test reagent revenue increased by more than 40%. We expect cancer testing to return to hospitals, mainly in the context of industry restructuring. The company fully benefits as a compliance leader deeply involved in the hospital market. ② International: In 2023, the company's international sales and pharmaceutical business achieved revenue of 258 million yuan (+24.68%). The company actively formed a localization team, further consolidated the overseas marketing system, and gradually expanded to emerging markets such as Southeast Asia and the Middle East. Currently, the company's ROS1 and PCR-11 gene products have been approved in Japan and other countries and included in medical insurance, and the products have maintained excellent accuracy and extremely high usage rates for many years in European EMQN and PQCC domestic and foreign interroom quality evaluations.

Along with drug diagnosis, the scope of cooperation continues to expand, empowering the world's leading pharmaceutical companies to develop clinical drugs. The company's pharmaceutical cooperation areas and regions continue to expand, and TKIs targeting/PARPI/immunotherapy/ADC have achieved a forward-looking layout associated with diagnosis. Currently, they have successfully accompanied diagnostic product development and registration experience on various technology platforms: ① PCR: PCR-11 cooperates with 13 pharmaceutical companies including Eli, Amgen, Merck, Takeda, Pill Farber, Kaiwa, and Guangshengtang; ② NGS: NGS-10 cooperates with Johnson & Takeda, etc.; BRCA1/2 cooperates with AstraZeneca, BeiGene, etc.; HRD cooperates with AstraZeneca, etc.; PD-L1: IHC, etc. ③ Cooperation with MSD Pabolizumab (K drug), Hengrui Pharmaceuticals carellizumab, HER2 cooperation with BeiGene, etc.; MET cooperation with Yellow Pharmaceuticals, etc.; ④ FISH: HER2 collaborates with BeiGene, etc. Currently, various innovative oncology drugs with 11 targets, including EGFR, KRAS, BRCA1/2, MSI, IDH1, and PD-L1, have been approved for marketing in collaboration with the company.

R&D innovation is driving the expansion of the product pipeline, and tumor detection solutions are becoming more and more abundant. In 2023, the company invested 203 million yuan (+16.44%) in R&D, accounting for 19.5% of revenue (-1.2pct). The company has independently developed and approved 26 types of cancer genetic testing products in China. It is a leading enterprise with the most complete range of products in the industry, and many products are still exclusively approved domestically. In 2023, the company added 9 new invention patents. MSI (microsat instability) products obtained the first certification for accompanying diagnosis of pan-cancer immunotherapy in China, and the high-throughput sequencer ADX-seq200 Plus was approved for marketing. In addition, in accordance with Class III IVD product development standards, the company has a wealth of LDT production lines and is currently being registered and approved, such as HRD and HRR products that guide the use of PARP inhibitors for ovarian cancer/breast cancer/prostate cancer/pancreatic cancer, ClassicPanel to guide targeted treatment testing for pan-cancer, Master Panel that meets the multiomic testing needs of pan-cancer types, and various molecular typing, auxiliary diagnosis, and early tumor detection products.

Investment advice: The company is a leading enterprise in the diagnostic industry, with remarkable production line richness and technological leadership, and the overseas market layout is gradually improving. In the future, as the competitive environment of the industry becomes clear, the company's domestic and foreign market share is expected to continue to increase as a high-quality leading enterprise with compliant management. We expect the company's net profit from 2024 to 2026 to be 325/3.98/480 million yuan, respectively, up 24.44%, 22.27%, and 20.60% year-on-year, and EPS of 0.82/1.00/1.20 yuan respectively. The current stock price corresponding to 2024-2026 PE is 25, 20, and 17 times, maintaining a “careful recommendation” rating.

Risk warning: the risk that the launch of a new product falls short of expectations, the risk that the price reduction will exceed expectations, and the risk that overseas market promotion results will fall short of expectations.