Core views
The company achieved steady growth on the revenue side in 2023, with slight disturbances on the non-profit side, mainly affected by factors such as overseas market expansion and platform switching. Recently, the company announced a number of collaborations to diversify the deployment of technology platforms, which will help gradually reduce service costs. At present, the deployment of the new platform has basically been completed. Laboratories in Germany, Japan, and Shanghai have been launched, and the global localization and regional centralization layout continues to be strengthened. Starting in 2024, it is expected that the company will return to a healthy growth trajectory. We are optimistic about the long-term development of the company under the trend of rising overseas outsourcing rates.
occurrences
The company released its 2023 annual report and 2024 quarterly report
In 2023, the company achieved operating income of 2.02 billion yuan, a year-on-year increase of 3.97%; realized net profit of 178 million yuan, an increase of 0.47% over the previous year; realized net profit without deduction of 140 million yuan, a year-on-year decrease of 8.92%.
The 24Q1 quarter achieved operating income of 468 million yuan, an increase of 6.32% year on year; realized net profit of 0.27 million yuan, an increase of 21.40% year on year; realized net profit without deduction of 21 million yuan, an increase of 6.85% year on year.
Brief review
The 23-year results were in line with expectations, and 24Q1 returned to a healthy growth trajectory
Revenue growth was steady, and 24Q1 returned to a healthy growth trajectory. The company achieved steady growth on the revenue side in 2023, with slight disturbances on the non-profit side, mainly due to the company 1) continuing to expand its overseas layout and increasing market investment, leading to an increase in sales expenses; 2) Starting in 23Q2, it entered the platform switching phase and successively launched the Illumina NovaSeq X Plus and PacBio Revio sequencing platforms. The new platform had an impact on the company's performance during the run-in and commissioning stages.
However, corresponding investment and platform upgrades are expected to continue to consolidate the company's leading position in the industry in the long term. Judging from 24Q1 performance, the company achieved good growth on both revenue and profit sides, and returned to a healthy growth trajectory.
Overseas growth continues to grow rapidly, and the share of revenue continues to rise. Looking at the main business regions in 2023, domestic revenue was 1,012 billion yuan, down 9.43% year on year, accounting for 50.7%; revenue from Hong Kong, Macao, Taiwan and overseas regions was 985 million yuan, up 22.06% year on year, accounting for 49.3% of revenue, accounting for an increase of 7.4 pct compared to the same period in '22. Domestic revenue has declined, and we believe it was mainly affected by the short-term run-in and commissioning of the new platform, as well as the existence of a certain amount of public health prevention and control revenue in the previous reporting period. The overall performance of the overseas business was good, benefiting from the company's global localization strategy. Revenue growth was significantly faster than the company's overall growth rate, and the share of revenue continued to rise.
Profitability remains stable. The company's gross profit margin in '23 was 42.73%, -1.55 pct year on year. It has stabilized in the 40%-45% range in recent years. The sales expense ratio in 2023 was 18.93%, +1.71 pct year-on-year, mainly due to the increase in sales expenses due to the company's continuous expansion of overseas layout and increased market investment. The management cost rate was 8.87%, -0.07 pct year on year, which is basically the same as the same period in '22; the R&D cost rate was 6.2%, -0.32 pct year on year, basically stable, and the company's R&D activities are being carried out normally according to the project plan. The financial expense ratio was -0.74%, -0.25 pct year on year. The decline in the financial expense ratio was mainly due to the increase in interest income from the company's increase in return on capital, and a decrease in exchange gains and losses due to exchange rate changes. The company's net interest rate in '23 was 9.15%, -0.28 pct year on year, and the net interest rate has remained around 10% in recent years.
Operating cash flow and balance ratio are continuously optimized. The net cash flow from the company's operating activities in 2023 was 334 million yuan, an increase of 9.9% compared with 304 million yuan in the same period in '22, mainly due to the increase in the company's revenue and the increase in customer repayments. Net cash flow from investing activities was $785 million, compared to $349 million for the same period in '22, mainly due to the increase in the company's investment financial assets. Net cash flow from fund-raising activities was 290 million yuan, or -45 million yuan for the same period in '22, mainly due to the company receiving additional funds raised. The company's balance ratio in 2023 was 31.18%, down 4.01 pct year on year, further falling to 29.24% in 24Q, and the balance and liability structure optimization continued to be optimized.
A number of collaborations were announced to diversify the deployment of technology platforms. As a leading enterprise in the field of genetic sequencing services in China, the company has recently continuously enriched the deployment of upstream technology platforms. Overseas companies: Deepen cooperation with Illumina and PacBio, and ordered 10 new Illumina NovaSeq XPlus and 6 PacBio Revio units respectively from the end of '23 to the beginning of '24, all of which were newly released devices; domestic companies: Successively cooperated with Huada Intelligent Manufacturing and Zhenmai Biotech to introduce Huada Zhizao DNBSEQ-T7 at the end of '23, and started registration of sequencers and detection reagents in April '24. On the one hand, deepening cooperation with overseas companies will help the company continue to empower global users and increase global market share; on the other hand, the introduction of localized platforms will help the company gradually reduce service costs and provide customers with richer and more cost-effective choices.
Laboratories in Germany, Japan, and Shanghai have been established, and the global localization and regional centralization layout continues to be strengthened. In December 2023, the company officially opened a new German laboratory at IZB, the biotechnology innovation and entrepreneurship center in Munich, Germany, to further enhance its service capabilities in the European region. In January 2024, the company officially announced the opening of a new laboratory in Japan and the deployment of the Illumina next-generation sequencing platform to the Japanese laboratory to serve local customers in Japan.
In March 2024, the company's Shanghai laboratory was officially opened. The laboratory is the company's first self-built laboratory in East China. The key sequencing indicators (Q30, Q20, mapping rate, effective rate values, etc.) are on par with the key indicators of the Tianjin Laboratory's flexible intelligent delivery system Falcon, which helps ensure sample timeliness, shorten the test cycle, and better serve customers in East China and surrounding regions. Currently, the company's global market share is still low. In the future, along with the increase in overseas outsourcing rates, the company's global localization strategy will help achieve a rapid response to local scientific research needs in North America, Europe, Southeast Asia, etc., and gradually increase global market penetration.
Future outlook: 2024 is expected to return to a healthy growth path, and the global layout continues to be implemented. Since 23Q2, the company's performance has fluctuated slightly in the short term due to the run-in and commissioning of the new platform. We believe that the new platform deployment has now been basically completed. At the same time, the company's recent continuous enrichment of technology platform deployment will continue to improve the service quality and delivery experience provided to customers, and it is expected to return to a healthy growth path starting in 2024. Judging from the global layout, overseas German and Japanese laboratories and domestic Shanghai laboratories have been launched one after another, helping to better serve regional customers, achieve rapid response to local research needs, and gradually increase global market penetration. It is expected to benefit from the trend of increasing overseas outsourcing rates.
Profit forecasting
We forecast that in 2024-2026, the company's revenue will be 2.33 billion yuan, 2.73 billion yuan, and 3.2 billion yuan, respectively, up 16.4%, 17.2%, and 17.2% year over year; net profit to mother will be 1.98, 2.37, and 282 million yuan, respectively, up 11.3%, 19.7% and 18.7% year on year, respectively. Equivalent EPS is 0.48 yuan/share, 0.57 yuan/share, and 0.68 yuan/share, respectively, and the corresponding PE is 28.1X, 23.4X, and 19.7X. The company is a leading company in the field of genetic sequencing services. In the future, as intelligent upgrades and global localization and regional centralization advance, the company is expected to continue to consolidate its leading position in the industry and maintain a “buy” rating.
Risk warning
Overseas business growth falls short of expectations: The company has set up subsidiaries to operate in Hong Kong, the United States, the United Kingdom, Singapore, the Netherlands, Japan, etc. Overseas revenue continues to increase as a share of the company's overall revenue, and undergrowth in overseas business will drag down the company's performance. Furthermore, if there are adverse changes in the relevant laws, regulations, politics, economic environment, etc. of the country where overseas operations are located, they may have an impact on the normal development and continued growth of the company's overseas business.
Risk of dependency on upstream suppliers: The genetic sequencing services provided by the company are in the middle of the genetic sequencing industry chain. The upstream is an R&D and manufacturer of instruments and consumables related to genetic sequencing, and the overall entry barriers are high. Currently, the upstream equipment and consumables suppliers introduced by the company are mainly Illumina, Thermo Fisher, Pacbio, Huada Intelligent Manufacturing, etc., and there is a risk of dependency on upstream suppliers. However, in recent years, upstream domestic enterprises have developed rapidly and broken overseas monopolies, and dependence on a single supplier may decrease in the future.
Market competition increases risk: The genomics application industry is developing and iterating rapidly. Technological upgrades such as upstream high-throughput sequencing have led to a continuous decline in sequencing costs, and market competition may intensify.