Key points of investment

Performance: Performance continued to be high, and new orders continued to increase in 2023A: The company achieved revenue of 1,017 billion yuan, YOY +67.51%, net profit to mother of 272 million yuan, YOY +40.07%; new orders signed in 2023 were 1,360 million yuan (tax included), an increase of 35.06% year on year.

2024Q1: Achieved revenue of 216 million yuan in the first quarter of 2024, YOY +34.04%; net profit to mother of 50 million yuan, YOY +42.06%.

Growth: Technological achievement transformation business led growth, with abundant momentum supporting high growth and continuous business split. In 2023, the company achieved revenue of 338 million yuan, YOY +55%; clinical service revenue of 193 million yuan, YOY +141%; self-development conversion revenue of 392 million yuan, YOY +78%; equity sharing achieved revenue of 29.63 million yuan, YOY -49%; CDMO achieved revenue of 52.49 million yuan, YOY +152%. We believe that the high return on the company's revenue side may be combined with: ① The company's overall R&D and production team expansion after the headquarters R&D center was relocated and Thermo production capacity was put into operation (total of 1,747 people, YOY +32%) and improved human efficiency (per capita income generated 582,400 yuan, YOY +27%); ② the average project value increased after the share of Class 3 drugs and difficult generic drug projects increased; ③ The company's 1,586 billion (excluding tax, YOY +18.90%) was sufficient to support the growth in performance growth; ④ The company's own research in 2023 was sufficient to support the growth in performance. The number of transformation projects has increased dramatically, due to factors such as 104 new R&D results and technology transformation (YOY +46.48%). Looking ahead, we expect that the company's R&D partner business model will gradually become clear, the transformation of nearly 300 self-developed projects will accelerate, or simultaneously increase demand for verifiable clinical trial projects, the successive commercialization of varieties already declared by Thermo (with a total of 282 acceptance numbers as of April 24, 2024), and the continuous commercialization of 85 authorized products by 2023 will support the company's continued steady rapid growth on the revenue side.

Profitability: Continued high profitability. We expect future trends to stabilize. In 2023, the company achieved a gross profit margin of 65.53%, YOY-1.84pct. The company's gross margin for the first quarter of 2024 was 68.19%, YoY+2.5pct. We expect gross margin fluctuations to be mainly related to changes in revenue structure. In terms of breakdown, the company's gross margin for contract pharmaceutical research in 2023 was 64.76%, YOY+4.26pct; clinical service gross margin was 44.02%, YOY-1.33pct; CDMO gross margin was 42.14%, YOY+10.08pct. We expect that the company's overall gross margin may be under downward pressure as the share of clinical services and CDMO business revenue increases; based on the company's integrated service capabilities and complex formulation technology platform advantages, we expect that the company's various business segments may still maintain high gross margins. In terms of cost rates, based on the continuous acceleration of the transformation of independent projects and the gradual increase in R&D difficulty of reserve projects, we expect that the company may still maintain a high R&D cost rate level of 20%-25%; on the other hand, as the scale effect continues to be reflected, the management cost rate and sales expense ratio may continue to be optimized.

Analysis of operating quality: Short-term fluctuations in net operating cash flow. It is expected that long-term growth will support the company to achieve a net operating cash flow of 90 million in 2023, which is a significant year-on-year decrease, mainly related to a sharp increase in operating cash outflows under business development and an increase in remuneration expenses due to an increase in personnel; net operating cash flow in the first quarter of 2024 - 122 million, mainly related to a year-on-year decrease in revenue of about 39.34 million and an increase in personnel remuneration payments of 3.64 million. In terms of accounting period, the company's accounts receivable turnover days in 2023 was 61.82 days, which was optimized year over year; the number of receivable turnover days in the first quarter of 2024 was 93.54 days, a decrease of one day over the previous year. Looking at the vertical comparison, we think the first quarter may not be the time point for the company's centralized repayment, so there was a big change from month to month. Looking ahead, we believe that at the stage of new business expansion and customer penetration rate increase, the company's net operating cash flow may fluctuate in the short term, but it may lay a solid foundation for the company's long-term growth, and we are optimistic about gradual recovery in the long term.

Profit forecasting and valuation

We expect the company to achieve operating income of 14.59/19.89/2,640 billion yuan in 2024-2026, an increase of 43.39%/36.32%/32.74%; achieve net profit to mother of 3.71/4.98/670 billion yuan, an increase of 36.30%/34.32%/34.50%, corresponding EPS of 3.40/4.57/6.15 yuan/share, and the closing price on April 23, 2024 is 20 times PE, maintaining a “buy” rating.

Risk warning

The risk of quarterly fulfillment volatility in the transfer split business; the risk of project R&D failure; the risk that business models from generic drugs to innovative drugs cannot be replicated; risk of credit concentration.