Incident: The company released its report for the first quarter of 2024. In the first quarter of 2024, it achieved operating income of 233 million yuan (+19.53%), net profit to mother of 64 million yuan (+12.01%), net profit of 57 million yuan (+26.44%), and operating cash flow of 81 million yuan (+19.27%).

First-quarter results were in line with expectations, and profitability continued to increase. 2024Q1 generated equity incentive expenses amortized $8.423 million. After excluding the impact of related expenses (without considering the impact of income tax), it achieved net profit of 726.22,300 yuan (+26.70%), after deducting non-net profit of 65.5052 million yuan (+45.13%). It is expected that the gross margin of 2024Q1 will increase by 0.59pct to 84.46%, mainly due to the increase in the share of high-margin innovative businesses and optimization of operating efficiency. In addition, the company's financial expenses for 2024Q1 were 3.263,400 yuan (mainly due to an increase in interest income from time deposits), and credit impairment surged back 775,700 yuan (it is expected mainly due to a reduction in preparation for bad debts and the recovery of related accounts).

R&D innovation is driving the expansion of the product pipeline, and tumor detection solutions are becoming more and more abundant. 2024Q1 invested 48 million yuan (+30.75%) in R&D, accounting for 20.76% (+4.89pct) of revenue. According to the company's announcement, in January 2024, the company obtained two new patent certificates: “a method for constructing a model to predict the efficacy of PD-1” and “a method for detecting small residual tumor lesions based on customized strategies.” At present, the company has independently developed various tumor genetic testing products and has been approved domestically. It is a leading enterprise with the most complete range of products in the industry, and many products are still exclusively approved domestically. MSI (microsat instability) products obtained the first certification for diagnosis of pan-cancer immunotherapy in China, and the high-throughput sequencer ADX-seq200 Plus was approved for marketing. In addition, in accordance with Class III IVD product development standards, the company has a wealth of LDT production lines and is currently undergoing registration and approval, such as HRD and HRR products to guide the use of PARP inhibitors for ovarian cancer/breast cancer/prostate cancer/pancreatic cancer, Classic Panel to guide the detection of pan-cancer targeted therapy, Master Panel to meet the multiomic testing needs of pan-cancer types, and various molecular typing, assisted diagnosis, and early tumor detection products.

Along with drug diagnosis, the scope of cooperation continues to expand, empowering the world's leading pharmaceutical companies to develop clinical drugs. The company's pharmaceutical cooperation areas and regions continue to expand, and TKIs targeting/PARPI/immunotherapy/ADC have achieved a forward-looking layout associated with diagnosis. Currently, they have successfully accompanied diagnostic product development and registration experience on various technology platforms: ① PCR: PCR-11 cooperates with 13 pharmaceutical companies including Eli, Amgen, Merck, Takeda, Pill Farber, Kaiwa, and Guangshengtang; ② NGS: NGS-10 cooperates with Johnson & Takeda, etc.; BRCA 1/2 cooperates with AstraZeneca, BeiGene, etc.; HRD ③ IHC: PD-L1 Cooperation with MSD Pabolizumab (K drug), Hengrui Pharmaceuticals carelizumab, HER2 cooperation with BeiGene, etc.; MET cooperation with Huang Pharmaceutical, etc.; ④ FISH: HER2 collaborates with BeiGene, etc. Currently, various innovative oncology drugs with 11 targets, including EGFR, KRAS, BRCA1/2, MSI, IDH1, and PD-L1, have been approved for marketing in collaboration with the company.

Investment advice: The company is a leading enterprise in the diagnostic industry, with remarkable production line richness and technological leadership, and the overseas market layout is gradually improving. In the future, as the competitive environment of the industry becomes clear, the company's domestic and foreign market share is expected to continue to increase as a high-quality leading enterprise with compliant management. We expect the company's net profit from 2024 to 2026 to be 325/3.98/480 million yuan, respectively, up 24.44%, 22.27%, and 20.60% year-on-year, and EPS of 0.82/1.00/1.20 yuan respectively. The current stock price corresponding to 2024-2026 PE is 26/21/18 times, maintaining a “careful recommendation” rating.

Risk warning: the risk that the launch of a new product falls short of expectations, the risk that the price reduction will exceed expectations, and the risk that overseas market promotion results will fall short of expectations.