Key points of investment
Both CDMO and emerging businesses grew rapidly in 2023. Revenue from commercialization projects is strongly supported by YOY, and I am optimistic that emerging businesses are ready to go.
Performance: Excluding large orders, the main business had high revenue growth in 2023, and achieved revenue of 7.825 billion yuan (YOY -23.70%, revenue of 5.405 billion yuan after excluding large orders, up 24.37% year on year), net profit to mother of 2,269 billion yuan (YOY -31.28%), after deducting non-net profit of 2.04 billion yuan (YOY -34.87%). Among them, 2023Q4 revenue was $1,442 million (YOY -40.99%), net profit attributable to mother of $59 million (YOY -89.89%), and net profit of $69 million (YOY -87.47%). We estimate that the profit side decline was mainly due to the large order base in 2022. The 2023 annual report revealed that excluding the order amount of confirmed revenue in 2023, the company's total order volume was US$884 million, providing support for the steady growth of the main business revenue in 2024.
Business segmentation: CDMO and emerging businesses are growing rapidly, and commercial project revenue YOY supports a strong small molecule, CDMO: commercial revenue is growing rapidly, and reserves for late-stage projects are abundant. In 2023, the small molecule CDMO business achieved revenue of 6.62 billion yuan (YOY -28.46%). If the revenue after excluding large orders is 4.200 billion yuan (YOY 25.60%), it can be seen that the 2023Q4 small molecule CDMO excludes large order revenue YOY and maintains a relatively fast level (2023Q1-Q3 small molecule CDMO excludes YOY 25.45% of large order revenue). In 2023, the company confirmed revenue for 40 commercialization projects, achieving revenue of 5.112 billion yuan, and revenue of 2,692 billion yuan after excluding large orders, an increase of 47.13% over the previous year; showing that revenue from commercial projects supported the revenue in 2023. The company confirmed revenue for 386 clinical-stage projects, an increase of 27 over the previous year. The revenue from clinical-stage projects confirmed revenue of 1,507 billion yuan, excluding the impact of specific antiviral projects, which was basically the same as the previous year. The company's annual report revealed that according to ongoing orders, the number of PPQ projects in the 2024 verification phase is expected to reach 28, an increase of 40% over 2023, forming sufficient commercial order reserves, providing a strong guarantee for long-term steady growth in performance.
Emerging businesses: Poor investment and financing are being dragged down, and biomacromolecules, formulations, technology exports, and synthetic macromolecules are ready to go. Emerging businesses achieved revenue of 1,199 billion yuan (YOY 20.42%) in 2023. Separated separately, 2023Q4's revenue from emerging businesses was YOY 19.11%, which is a good increase compared to 2023Q3 revenue YOY 1.21%. The company continues to accelerate the construction of commercial peptide production capacity to support the continuous development of commercial peptide production outsourcing services. As of the disclosure date of the annual report, the total production capacity of solid phase synthesis was 10,250L, and the company expects to reach 14,250L by the end of June 2024 to meet the commercial production needs of customers.
Profitability: Mainly affected by amortization+large order fluctuations
The 2023Q4 gross profit margin was 38.03% (-10.76pct year over year). We estimate it was mainly due to the high gross margin base and capacity amortization under the 2023Q4 big order delivery. The 2023Q4 net interest rate was 3.47% (-20.01 pct year on year), and the 2023Q4 expense ratio increased significantly. Among them, the sales expense ratio increased by 1.77 pct year on year, the management expense ratio increased by 4.13 pct year on year, the R&D expense ratio increased 2.59 pct year on year, and the financial expense ratio decreased by 0.58 pct year on year. We believe that the increase in the fee rate is mainly related to the lower fee rate in 2022/Q4 due to the higher base of large orders in 2022/Q4. After the delivery of large orders is completed, along with the gradual recovery of investment and financing, we expect the company's gross margin and net interest rate levels to gradually return to normal levels.
Profit forecasting and valuation
The company's 2024 outlook is disclosed in the company's 2023 performance ppt (wind): in a context where the industry is still undergoing an adjustment period, it aims to maintain a 15% to 25% increase in non-COVID-19 revenue. Carefully considering the impact of investment and financing on the company's revenue and amortization pressure on production capacity, we lowered our revenue and profit expectations for 2024-2025. We expect the company's EPS to be 3.39, 3.90, and 4.94 yuan in 2024-2026 (the previous forecast is 4.96 and 6.23 yuan for 2024-2025, respectively), and the closing price on April 17, 2024 corresponds to 23 times the 2024 PE. Considering the company's small molecule CDMO's good PPQ project in progress, we think it still has strong growth potential. Emerging business segments such as peptide CDMO, formulation CDMO, and technology export still have a lot of room for growth and performance flexibility, so we maintain a “buy” rating.
Risk warning
The risk of a decline in global investment in innovative drug R&D, risk of new business expansion falling short of expectations, competition risk, exchange risk, risk of underperformance, and risk of new production capacity falling short of expectations.