Event: On April 22, 2024, the company released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved operating income of 4.823 billion yuan, an increase of 26.24%; net profit to mother of 941 million yuan, an increase of 128.56% over the previous year; net profit after deducting non-return to mother of 936 million yuan, an increase of 109.55% over the previous year. In Q1 2024, the company achieved operating income of 1,533 billion yuan, a year-on-year increase of 19.96%; realized net profit of 353 million yuan, an increase of 100.99% over the previous year, after deducting net profit of 352 million yuan, an increase of 101.87% over the previous year.

Revenue and profit have grown rapidly, and the volume and price of core products have risen sharply & costs have been reduced and efficiency increased. In 2023, the company achieved revenue of 4.823 billion yuan, up 26.24% year on year. Among them, the company's revenue of erythromycin thiocyanate accounted for 32.13%, reaching 1,550 million yuan, up 17.30% year on year; cephalosporin intermediates revenue accounted for 19.96%, reaching 963 million yuan, up 15.02% year on year; penicillin intermediates accounted for 40.12% revenue, reaching 1.95 billion yuan, up 40.93% year on year.

In 2023, the company's gross sales margin was 31.57%, up 6.77pct year on year, and the net sales margin was 19.50%, up 8.73 pct year on year. The company's profitability continued to increase, mainly due to: ① The recovery in market demand and the volume and price of the company's main products rose sharply. According to wind data, the prices of erythromycin thiocyanate and 6-APA were 522.5 yuan/kg and 330 yuan/kg respectively in March 2024, and the price is expected to remain high; ② The company's process technology continues to improve, through active promotion of the green economy and saturation Production, energy saving and consumption reduction have achieved results in cost reduction and efficiency; ③ Interest expenses were reduced and exchange income increased, and the financial expense ratio decreased by 2.28 pct over the same period last year.

The company has achieved remarkable results in reducing costs and increasing efficiency, and has gradually entered a new growth cycle.

Combined with artificial intelligence applications, cost reduction and efficiency are expected to reach another level. The company has established a strategic partnership with Shanghai Jinyu Technology. The two sides will cooperate in AI empowering the fermentation industry, AI-assisted synthetic biology research and development, and cooperative development of new products. On the one hand, combine artificial intelligence with Chuan Ning Biotech's existing industry to form a new quality of productivity as soon as possible to comprehensively improve the company's production methods and production efficiency. Specifically, it includes building a generative artificial intelligence virtual engineer, establishing a generative artificial intelligence engineering platform that can explain raw materials, processes, and yield, and achieving a new paradigm and systematic improvement of the efficiency of antibiotic intermediate production through machine learning iterative feedback. On the other hand, artificial intelligence is used to aid synthetic biology research and development, and generative AI is used to help improve the performance of key enzymes in metabolic pathways and predict targets in complex metabolic pathways, thereby improving the efficiency, carbon conversion rate, and spatio-temporal conversion rate of terminal small molecule products. The company's cost reduction and efficiency are expected to reach a new level.

R&D and innovation have borne fruit, and the release of synthetic biology products is imminent. At present, Ruikang Biotech has independently developed and delivered products such as bisabolol, 5-hydroxytryptophan, ergothione, inositol, squalane, and ecdoine to Twining Biotech. Among them, bisabolol has entered the production and sales stage, and the 5-hydroxytryptophan pilot phase has been completed and has entered the trial production stage; ergothione has entered the pilot phase; the inositol trial has now been completed. The commercial production of synthetic biology series products also marks the company's successful transformation from being driven by resource factors to being driven by technological innovation, thus achieving a steady increase in the company's efficiency.

Investment advice: Demand for antibiotics is booming, and the implementation of synthetic biology projects can be expected to increase. The company's net profit for 2024-2026 is estimated to be 1,244 billion yuan/1,470 billion yuan/1,705 billion yuan respectively, up 32.29%/18.12%/15.97% year-on-year. The corresponding PE is 17/14/12 times, respectively, covered for the first time, and given a “recommended” rating.

Risk warning: synthetic biology project R&D risk; risk of product price fluctuations; environmental risk; exchange risk; risk of worsening competition due to price cuts from domestic and foreign competitors, etc.