Matters:
The company announced its 2023 annual report, achieving revenue of 1,117 billion yuan (-4.6%), net profit of 227 million yuan (-8.1%), and net profit of 158 million yuan (-4.3%) after deducting net income from mother. The performance was slightly under pressure. 2024Q1 achieved revenue of 315 million (+13.4%), net profit of 75 million yuan (+23.0%), net profit after deduction of 52 million yuan (+12.4%), and performance gradually recovered.
In 2023, the company plans to pay a cash dividend of 5.8 yuan for every 10 shares and increase 4.7 shares for every 10 shares to all shareholders.
Ping An's point of view:
The company's collection risks have basically been clarified, and the quantity of large refined hemp products released is highly certain. The company's sales revenue declined in 2023 due to the implementation of the seventh batch of national collection of key products, sodium ibandronate and caffeine citrate, and the profit side was briefly pressured. The gross margin in 2023 was 80.01% (-3.24pp), the net margin was 20.28% (-0.78pp), while the 2024Q1 gross profit margin remained stable at 79.82%, with a net margin of 23.81% (+1.86pp). Profitability was gradually repaired, and the impact of collection basically bottomed out. In 2024, with the approval of the company's naburpine hydrochloride and butorphinol rutartrate injections, and various “barefoot” varieties winning the bid for drug shortages in Guangdong, there is a strong certainty that revenue side will resume growth, and profitability recovery is expected to accelerate. In terms of period expenses, due to product collection, the company's sales expenses rate in 2023 was 34.42% (-6.09pp), which improved significantly. The management cost ratio was 8.85 (+1.14pp), and the R&D expense ratio was 21.35% (+1.63pp), an increase over the previous year.
The refined hemp specialty innovation pipeline continues to advance, and it is expected to usher in intensive catalysis in the short to medium term. In terms of innovative small-molecule drugs, the company is making every effort to speed up clinical trials of phase III single drugs of eugliptin tablets according to plan. Project summary is ongoing, and the final data is expected to be read out in 2024H1. The improved new drugs aminophen oxycodone sustained-release tablets and morphine sulfate naltrexone hydrochloride extended-release capsules have entered the clinical research stage and are expected to be submitted for NDA in the second half of 2024. In terms of biopharmaceuticals, the new non-opioid analgesic class 1 drug EP-9001A monoclonal antibody targeting NGF has entered phase IB/II clinical research, and it is expected that phase II clinical data will be read out in 2025.
Specialty hemp injections go overseas, driving the company's long-term growth. In terms of internationalization of formulations, the company combines its strengths to focus on building a pipeline of opioid antidotes and emergency medicine products, and at the same time lays out a large variety of complex formulations and unique 505b2 products that break through original research forms and formulation patents.
Among them, the small-volume injection production line of the subsidiary Shuode Pharmaceutical successfully passed on-site inspection by the US FDA. Nalmefene hydrochloride injection was approved for marketing by the US FDA in November 2023. The internationalization of the company's formulations achieved a breakthrough from 0 to 1, and the FDA is reviewing nicardipine injections. In addition, the EP-0125SP and EP-0112T nasal sprays have completed process verification, and stability studies will continue; the 505b2 product EP-0113T nasal spray has developed an advantageous new prescription, which will further investigate the stability and clinical effects of the new prescriptions, which is expected to form a synergy effect with related injectable products and open up a growth ceiling.
Investment proposal: Affected by the volume of collected products falling short of expectations, we lowered the company's revenue for 2024-2026 to $1,454/18.17/2.272 billion yuan (originally 2024/2025 was $1,568/2.025 billion yuan), and net profit for 2024-2026 by $2.89/34/457 million yuan (originally 2024/2025 was $334/457 million). The current stock price corresponds to 24.9 times the company's PE in 2024. Considering that the company has launched many new products, the internationalization of formulations is expected to gradually materialize and maintain the “recommended” rating.
Risk warning: 1) R&D risk: The company is developing many varieties and has a formulation export layout. There is a possibility that progress falls short of expectations or failure. 2) Risk of the release of new varieties falling short of expectations: The company has many new varieties. Affected by factors such as sales and promotion capabilities, there is a possibility that the volume will fall short of expectations. 3) Pharmaceutical exports fall short of expectations: The company's pharmaceutical export volume and revenue growth are less likely than expected.