The deduction of non-net profit for 2023 is in line with our expectations

The company announced its 2023 results. Revenue of $41.4 billion, -6% YoY; net profit attributable to mothers/net profit after deduction of non-net profit were $23.9/20.01 billion, respectively, or -36%/-48% YoY. The deduction of non-net profit was in line with our expectations.

Development trends

2023 was affected by the COVID-related year-on-year decline, and management/financial expenses also increased. New products/sub-new products (Hans shape, Han Quyou, Su Kexin, etc.) are growing rapidly in 2023. Overall revenue and profit declined. The company said it was mainly due to a sharp year-on-year decline in COVID-related revenue and preparation for disposal and impairment of related products and assets; in addition, financial expenses increased by 340 million yuan year-on-year due to interest hike/appreciation of the US dollar and changes in the size of interest-bearing liabilities; increased management expenses due to changes in labor costs/consulting expenses; and related expenses due to GlandPharma mergers and acquisitions. After COVID-related deductions, revenue in 2023 was +12.4% YoY.

All businesses are stable as a whole. By sector, 1) Pharmaceutical business revenue was 32 billion yuan, -2% YoY; after deducting COVID-19 products, +13.5% YoY. Among them, anti-tumor and immunomodulatory revenue was +38% year-on-year, and PD-1 revenue was 1.12 billion yuan. China has been approved for the four indications of MSI-H solid tumors, SqnsCLC, ES-SCLC, and ESCC. In June 2023, Yikaida was approved for r/r LBCL second-line indications. By the end of 2023, it had treated more than 600 patients. Qutuzhu's revenue was 2.75 billion yuan (+58% YoY), Sukexin's revenue was 920 million yuan (YoY +20%); anti-infective income -49% YoY, metabolic and digestive income -2% YoY, cardiovascular income -21% YoY, central nervous system revenue +18% YoY, and API and intermediates revenue +2% YoY. 2) Revenue from the medical device and medical diagnosis business was -37% year over year. In addition to the year-on-year decline in COVID-related business, the company also indicated that sales in the routine medical diagnosis business fell short of expectations. With 55 Da Vinci surgical robots installed, Fosun's intuitive LON bronchial navigation operation control system was approved for listing by the State Drug Administration in March 2024, and Furui Medical Technology completed the acquisition of a Chinese dealer. 3) Healthcare and service revenue was +10% year-on-year, and segment losses narrowed to $440 million ($790 million in 2022). We expect continuous harvesting of innovative results. The company expects to submit an FDA marketing application for PD-1 monoclonal antibodies by the end of 2024 or the beginning of 25. The marketing applications for long-acting botulinum toxin RT002 in China were accepted in April/July 2023, respectively, and we expect to receive approval one after another starting in 2024. The company expects products such as FCN-437c (CDK4/6 inhibitor, second-line breast cancer), putomani (multidrug-resistant tuberculosis), and Tenapanor (NHE3, end-stage kidney disease) to be approved for marketing in 2024.

Profit forecasting and valuation

We kept the 2024 non-net profit forecast unchanged, and first introduced the 2025 deducted non-net profit forecast of 3.41 billion yuan. The current stock price corresponds to 21/18 times the non-net profit ratio of A shares, which corresponds to 10 times /8 times H shares. We maintained an outperforming industry rating. Considering the overall fluctuation in the pharmaceutical sector, the target price for A shares was lowered by 11% to $34.5, corresponding to the 2024/25 deducted non-price-earnings ratio of 30/27 times, with 48% upside compared to the current price of A shares; considering the continued pressure on H shares, the target price of H shares was lowered by 23% to HK$18.6, corresponding to the 2024/25 price-earnings ratio of 14/12 times, with 47% upside compared to the current price of H shares.

risks

The medical industry has been overhauled, collection and price reductions have exceeded expectations, research and development has failed, and the promotion of new products has fallen short of expectations.