Incidents:
On April 15, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 8.674 billion yuan, a year-on-year increase of 0.42%, achieved net profit of 1,071 billion yuan, an increase of 505.34% over the previous year, and realized deducted non-net profit of 1,181 billion yuan, an increase of 60.11% over the previous year. Looking at a single quarter, in 2023, Q4 achieved operating income of 2.03 billion yuan, a year-on-year decrease of 16.04%, and realized net profit of 39 million yuan, a year-on-year decrease of 51.62%, after deducting non-net profit of 127 million yuan, an increase of 367.59% over the previous year.
The deduction of non-net profit was in line with expectations, and the main Chinese medicine industry achieved steady growth.
Referring to the performance forecast announced in January 2024, the company expects to achieve deducted non-net profit of 11.56 to 1,276 billion yuan in 2023, an increase of 60%-77% over the previous year. The final deducted non-net profit growth falls within the forecast range, which is in line with market expectations. In terms of revenue split, the company's pharmaceutical industry achieved revenue of 7.421 billion yuan in 2023, an increase of 3.22% over the same period (after retroactive adjustment). Among them, the company's main Chinese medicine business achieved revenue of 5.971 billion yuan, an increase of 6.62% over the same period (after retroactive adjustment), which is the main source of the company's revenue growth; in 2023, the company's pharmaceutical business achieved revenue of 1,215 billion yuan, a year-on-year decrease of 14.21%. As the company focused on its main business and directed effective resources to the profitable Chinese medicine sector, the company achieved a significant year-on-year increase in deducted non-net profit in 2023. Specifically, in 2023, the gross margin of the company's main business reached 66.85%, with a year-on-year increase of 2.96pct, of which the gross margin of traditional Chinese medicine reached 72.24%, an increase of 2.36pct; in 2023, the company's deducted non-net interest rate reached 13.62%, an increase of 5.22pct; in 2023, the company's sales expense ratio was 34.40%, an increase of 0.89pct year on year, we think it was mainly due to business restructuring; the company's management expense ratio in 2023 was 3.95%, a year-on-year decrease of 0.33pct; 2023 The annual financial expenses ratio of the company was -0.22%, a year-on-year decrease of 0.57pct.
Through the balance sheet and cash flow statement, the quality of the company's operations has improved significantly.
According to the balance sheet and cash flow statement, since 2019, the company has entered a downward cycle of channel inventory, and the quality of operations has improved dramatically. This trend was further strengthened in 2023.
Looking at the balance sheet, the balance of accounts receivable and notes receivable declined sharply for 5 consecutive years from a high of $11.274 billion at the end of 2018. By the end of 2023, the company's accounts receivable and notes receivable balance was 688 million yuan, a further decrease of 203 million yuan over the same period last year. At the same time, the company's cash reserves (monetary capitals+transactional financial assets) reached 4.751 billion yuan by the end of 2023. Judging from the cash flow statement, the company's net operating cash flow reached 2,576 billion yuan in 2023, and the cumulative net operating cash flow in the past 5 years (2019-2023) reached 11.133 billion yuan, which is significantly higher than the company's net profit level, and the cash return is obvious.
The mid- to late-stage clinical R&D pipeline is well-stocked and is about to enter the batch implementation stage.
In 2023, the company's R&D investment reached 1,315 billion yuan, an increase of 29.49% over the previous year. The R&D departments of traditional Chinese medicine+chemicals+biopharmaceuticals have all made positive progress. The R&D pipeline is rich in reserves in the middle and late stages of clinical trials, and is about to enter the batch implementation stage. 1) Looking at the Chinese medicine research and development pipeline: loquat lung cleansing drink and Wenjingtang, 2 classic recipes were declared for listing (NDA); as of the end of 2023, 19 projects were in clinical phase II and phase III studies, of which 7 new Class 1.1 traditional Chinese medicines were in phase III clinical phase; in terms of internationalization, T89 (compound salvia) to treat chronic stable angina pectoris and prevent acute plateau syndrome (AMS) are in phase III clinical phase. Among them, T89-AMS has completed phase III clinical trials. 2) Looking at the chemical drug development pipeline: various generic drugs have submitted applications for marketing and consistency evaluation; PXT3003, which treats fibular muscular atrophy, has completed all phase III case studies; Class 1 innovative drug PARP inhibitors are advancing phase II clinical trials; class 1 innovative drug, JS1-1-01, has completed phase I clinical trials and successfully advanced phase II clinical research. 3) Looking at the biopharmaceutical research and development pipeline: the phase IIIc verification test of Puyuk's acute ischemic stroke indication completed all cases; amigumab phase IIb clinical enrollment was completed; recombinant human fibroblast growth factor 21 injection was completed in the NASH phase I clinical trial and was newly approved for NASH indications in China; PD-L1/VEGF double antibody B1962 injection is undergoing phase I clinical research; Stro-002 has been approved for domestic clinical trials and phase I clinical studies are being carried out.
Investment advice:
We expect the company's revenue from 2024 to 2026 to be 9.448 billion yuan, 10.339 billion yuan, and 11.379 billion yuan, respectively, and net profit to mother of 1,380 billion yuan, 1,808 billion yuan, and 1,870 billion yuan respectively. Considering the significant improvement in the quality of the company's operations, the mid and late clinical R&D pipeline is rich, and long-term growth can be expected. The company was given a PE valuation of 25 times in 2024, corresponding to a target price of 23.00 yuan for 6 months, and an investment rating of buy-A.
Risk warning: Risk of price fluctuations of Chinese herbal medicines, risk of price reduction in the collection of proprietary Chinese medicines, risk of R&D project failure.