Incident: The company released its 2024 quarterly report. In the first quarter, it achieved operating income of 3.198 billion yuan, a year-on-year increase of 3.65%, and net profit to mother of 244 million yuan, an increase of 1.84% year-on-year, after deducting non-net profit of 239 million yuan, an increase of 2.42% year-on-year.

In line with expectations, performance grew steadily under pressure from the industry. Against the backdrop of increased competition and declining prices, the company's 2024Q1 revenue performance was steady, up 3.65% from the high base of the same period last year. Net profit to mother was 244 million yuan (+1.84%, same below), after deducting non-net profit of 239 million yuan (+2.42%), a record high. Operating cash flow grew rapidly, up 25.65% year on year, mainly due to a decrease in net cash flow from financing activities.

Division of business: (1) CDMO: Overall, it has maintained rapid growth, and its competitive strength continues to increase. 2024Q1's revenue was 500 million yuan (-12.57%), mainly affected by 2023Q1 special projects. The gross profit margin was 37.12%, up 5.73% from the previous month.

The number of projects continues to grow rapidly, with 330 projects quoted in Q1 (+34.00%) and 814 ongoing projects (+41.00%), including 512 R&D projects (+63.00%) and 302 commercialization projects (+29.00%, including 218 human medicine projects, 47 veterinary medicine projects, and 37 other projects). There are a total of 89 API cooperation projects (+39%), of which 18 have entered commercial production, 13 projects are in the verification phase, and 58 projects are in the R&D stage. The company's R & D and production capacity continues to increase, and the technology platform is continuously improved. Currently, the company is focusing on strengthening technology construction such as PROTAC and ADC. High-activity projects are growing steadily. Synthetic biology, enzyme catalysis, and fluid chemistry technology platforms have been widely used in many CDMO projects. The peptide technology platform has made substantial progress. A new high-end formulation workshop is already in the design stage, and it is expected to invest in the construction of a new multifunctional peptide synthesis workshop in 2024.

(2) API intermediates: The price of veterinary drugs is still in the bottom range. The antibiotic series has significant advantages. The market share of core products is rising steadily, focusing on DMF declarations, and the growth is steady. 2024Q1's revenue was 2.56 billion yuan (+5.71%), up 7.53% month-on-month, and gross profit margin was 16.62%, up 0.84% month-on-month. The company expects to add 30-50 DMFs over the next 3-5 years, which will provide strong support for the steady growth of the API business. Mass production of GCLE will further enhance the cost advantages of cephalosporin products.

(3) Formulations: Products continue to expand, capacity construction is being implemented one after another, cephalosporin products have significant competitive advantages and steady growth.

2024Q1's revenue was 342 million yuan (+ 20.08%), up 7.53% month-on-month, and gross profit margin was 56.07%, up 2.19% month-on-month. The company continues to promote a “multi-variety, multi-channel” strategy, focusing on varieties with market prospects and differentiated high-tech barriers, actively promoting cooperation with pharmaceutical CDMO and CRO companies, and signing a “strategic cooperation framework agreement” with Heze Pharmaceutical, which is expected to efficiently advance the development process of simeglutide injections.

Expense ratio: The gross profit margin and cost ratio have remained stable, and R&D investment has been reduced appropriately. Gross profit margin: The gross margin for Q1 2024 was 24.04% (-3.92%), up 1.57% from the previous quarter. Expense rate: Sales expense ratio of 4.95% (+0.58pp) in the first quarter, mainly due to growth in the formulation sector, management expenses ratio of 3.99% (-0.44pp), financial expenses ratio -0.12% (-0.68pp). The total cost rate for the three items was 8.82% (-0.54pp). R&D investment: 24Q1 R&D expenses were 155 million yuan (-24.38%), accounting for 4.78% of revenue (-1.77pp), mainly due to partial capitalized R&D investment transfer expenses. After deducting the impact, it is basically the same as last year. Considering the continued expansion of formulation R&D projects, it is expected that R&D investment will continue to grow throughout 2024.

Profit forecast and investment suggestions: According to the 2023 results and the company's future plans, the company's 2024-2026 revenue is expected to be 121.40, 129.96, and 14.107 billion yuan, up 5.80%, 7.05%, and 8.55% year-on-year; net profit to mother is 11.68, 13.67, and 1.61 billion yuan, up 10.65%, 17.05%, and 17.81% year-on-year. Considering the steady growth in the company's performance, the valuation is reasonably low, and the “buy” rating is maintained.

Risk warning events: risk of product development and technological innovation; risk of changes in the international trade environment; risk of environmental protection and production safety; risk of exchange rate fluctuations; risk of delays or untimely updates of public data.