The 2023 results are in line with our expectations, and the 2024Q1 results are lower than our expectations. The company announced its 2023 results: revenue of 720 million yuan, +13.15% year over year; net profit to mother of 160 million yuan, +43.27% year over year; deducted non-net profit of 130 million yuan, +26.92% year over year; in line with our expectations.

The company announced 2024Q1 results: revenue of 180 million yuan, +10.19% year on year; net profit to mother of 0.2 billion yuan, -19.95% year on year; deducted non-net profit of 0.2 billion yuan, -18.42% year on year; lower than our expectations, we judge that it was mainly due to increased management expenses and macro-environmental impact.

Development trends

Clinical operations and field management services grew steadily in 2023. Looking at 2023 by sector: 1) Clinical operating revenue of 354 million yuan, +18.32% year over year, gross profit margin 39.81%, +7.50ppt year over year. Growth has been steady and gross margin has increased markedly. 2) Site management: Revenue of 186 million yuan, +20.58% YoY, gross profit margin 29.57%, YoY +8.41ppt. Gross margin improved markedly after the pandemic. 3) Statistics: Revenue of 80 million yuan, +9.87% year over year, maintaining growth trend, gross profit margin 43.47%, year-on-year -11.0ppt.

I am optimistic that the market share of high-quality clinical CRO will increase. The amount of new contracts signed by the company in 2023 was 976 million yuan, +20.01% year-on-year. The new orders were mainly from pharmaceutical companies and biotechnology companies in China. In the long run, policies encourage enterprises to avoid burgeoning targets and indications, place higher demands on R&D capabilities, and further promote the upgrading of structural demand in the innovative drug research and development industry chain. We believe that in the context of traditional pharmaceutical companies' lack of R&D functions, high-quality clinical CROs assume the outsourcing function of the supply system and the function of guiding and consulting for the transformation of traditional pharmaceutical companies. The scarcity of production capacity of leading clinical CRO is prominent, and the strong are always strong.

Profit margins were under pressure in the first quarter of 2024. 2024Q1's gross profit margin was 37.84%, up 36.42% from 2023Q1, but it decreased by 41.23% month-on-month in 2023Q4. We judge that it is mainly due to the impact of the industry environment, and the gross margin is weak on a phased basis. 2024Q1 management expenses were RMB 27.73 million, +77.97% year-on-year, mainly due to the increase in share payments due to the equity incentive policy.

Profit forecasting and valuation

Due to increased management expenses and macro-environmental impacts, we lowered our 2024/2025 net profit by 8.0%/12.2% to 197 million yuan/232 million yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 24.4 times/20.8 times. It maintained an outperforming industry rating, but due to recent systemic adjustments in the pharmaceutical sector's valuation center, we lowered our target price by 22.1% to 65.00 yuan, which corresponds to 31.6 times the 2024 price-earnings ratio and 26.9 times the 2025 price-earnings ratio. There is 29.7% upside compared to the current stock price.

risks

Policy changes, risk of litigation, increased competition, increased costs, rising labor costs, and fluctuations in investment in research and development of new drugs.