The main business excluding specific vaccine projects will continue to grow rapidly in 2023. We are optimistic that the company's overseas orders and orders from multinational pharmaceutical companies will continue to grow, driving the company's performance to an upward inflection point.

Performance: Main business revenue YOY maintained relatively rapid growth in 2023

The company disclosed its 2023 results: revenue of 7.384 billion yuan (YOY 4.21%), net profit of 2,025 billion yuan (YOY 0.91%), net profit of 1,477 million yuan (YOY -4.05%), in a single quarter, achieved revenue of 1,734 billion yuan (YOY 3.22%), net profit to mother of 145 million yuan (YOY-63.86), net profit of 279 million yuan (YOY -19.74%). We estimate that the large decline in net profit YOY in 2023Q4 may be related to net income loss of 358 million from changes in fair value (2022Q4 net income from change in fair value of 133 million yuan, data from wind). Referring to the 2023 Interim Report and the 2023Q3 performance review analysis, we believe that the company's revenue YOY will continue to grow rapidly in 2023 after deducting specific vaccine projects.

Business segmentation: SMO and digital systems are growing rapidly. I am optimistic that new orders will continue to resume, and see business: SMO and digital systems are growing rapidly. Clinical trial technical services achieved revenue of 4.168 billion yuan (YOY 1.04%) in 2023, mainly due to a decrease in clinical trials of specific vaccine projects carried out by the company, and the increase in clinical trial technical service revenue after excluding such projects. Revenue from clinical trial-related services and laboratory services was $3.121 billion (YOY 8.51%), mainly due to increased revenue from field management and patient recruitment, data management and statistical analysis, and laboratory services.

Look at orders: Ongoing orders are still growing under larger volumes. I am optimistic about the sustainability of MRCT and MNC domestic orders. The company added a net contract amount of 7.85 billion yuan in 2023, a year-on-year decrease of 18.8% due to cancellation of orders by some customers in 2023Q4, negative contract changes, and a sharp year-on-year decrease in handling fees for new orders. With on-hand orders of 14.08 billion yuan (YOY 2.1%), the company achieved rapid growth in new orders and business in the North American market. In 2023, the company added 15 new MRCT projects, and accumulated more than 127 MRCT project experience. We are optimistic about the company's ability to receive more high-quality MRCT orders as its global service capabilities continue to improve. At the same time, we are also optimistic about the flexibility of domestic orders as multinational pharmaceutical companies and device companies continue to increase their investment in China.

Profitability: Rapid growth in laboratory service costs and SMO dragged down the overall gross margin of the main business gross margin of 38.18% (down 1.15pct year on year), of which the gross profit margin of clinical trial technology was 38.21% (up 0.58pct year on year, mainly efficiency improvement+reduction in expenses related to third party suppliers), and 38.16% of clinical trial-related services and laboratory services (down 3.6 pct year over year, mainly due to increased costs associated with new business and new experimental facilities+rapid growth of the low gross margin SMO business).

The 2023 deducted non-net interest rate is 20.01% (-1.72pct year on year). Looking at the cost ratio: 2023 financial expense ratio +0.76pct year over year, sales expense ratio +0.42pct year over year, R&D expense ratio +0.23pct year over year, and management expense ratio -0.08pct year over year.

Outlook: Looking forward to overseas, optimistic about the ability to continue receiving orders

We believe that as the layout of the company's overseas operation network continues to improve, it will not only be possible to accept more overseas orders, but orders from local innovative drug companies to carry out MRCT are also expected to continue to grow. The company's annual report also revealed, “The company first initiated and implemented a phase I clinical trial of the Chinese herpes zoster protein vaccine in the mainland of the US in 2023; initiated and carried out phase III clinical trials of the quadrivalent influenza conjugate vaccine in Indonesia, with more than 1,400 enrollees; and completed 2 large-scale clinical studies of phase III protective efficacy vaccines carried out by the China Center for Disease Control and Prevention in 2023, with a total number of patients enrolled in more than 38,000 cases. The company has established long-term strategic cooperation with many domestic centers for disease control and prevention, and continues to carry out phase I-IV vaccine clinical trial projects.” These optimistic new vaccine orders are also gradually contributing to performance flexibility.

Overseas clinical operations continue to improve, and we look forward to strengthening: “The company's US clinical operation service has established a comprehensive integrated platform including center launch, project management, clinical operation, etc., and a complete operation team. The company has a business layout in 42 cities in the US and Canada, and has a project manager (PM) and CRA team of more than 110 people. We have more than 100 clinical operation project experiences in the US and have collaborated with more than 500 clinical research centers in 45 US states”. We expect the company to continue to strengthen its leading clinical CRO position in the context of the continuous upward development of the local innovative drug industry. At the same time, we also expect continued growth in the company's medium- to long-term performance as internationalization continues to break through.

Profit forecasting and valuation

Considering the recovery trend of investment and financing in the healthcare industry and the volatility of the company's investment income (net income from fair value change of 353 million yuan in 2023, 536 million yuan in 2022, net income from fair value change declined in 2023), we adjusted our profit forecast for 2024-2025. We expect the company's EPS to be 2.54, 2.97, and 3.57 yuan in 2024-2026 (the previous forecast was 3.22 and 3.85 yuan for 2024-2025 EPS), and the closing price on April 15, 2024 corresponds to 21 times the 2024 PE. Considering that the company is a leading local clinical CRO, leading barriers continue to be reflected, we are optimistic about the company's performance growth, and considering that the company's internationalization is expected to enter an accelerated phase, we maintain a “buy” rating.

Risk warning

Risk of worsening investment and financing of innovative drugs, risk of fluctuating clinical trial policies, risk of new business integration falling short of expectations, risk of performance falling short of expectations, risk of measurement bias.