The 2023 results fell short of our expectations. 1Q24 was in line with our expectations that Zhejiang Pharmaceutical's 2023 revenue was 7.794 billion yuan, -4.0% year on year; net profit to mother was 465 million yuan, corresponding to profit per share of 0.48 yuan, or -13.9% year-on-year, lower than our expectations. The decline in the company's performance was mainly due to poor downstream demand and increased supply-side competition, which led to a sharp decline in vitamin A and E profits. Among them, 4Q23 achieved revenue of 1.918 billion yuan, down 3.7%/1.1% month-on-month; net profit to mother was 128 million yuan, up 133%/341% month-on-month, mainly due to confirmation of compensation income from the relocation of the vitamin factory of 330 million yuan. Vitamin prices continued to decline in 4Q23, and the company's gross margin fell 4.5ppt to 27.4% month-on-month.
In 2023, the life nutrition business revenue was 3.273 billion yuan, down 14.8% year on year; sales volume of vitamin series products was 38,517 tons, down 3.61% year on year; gross margin fell 5.3 ppt to 31.3% year on year due to falling product prices. The pharmaceutical manufacturing business generated revenue of 2.92 billion yuan, up 8.7% year on year; gross margin remained flat at 63.9%. The pharmaceutical commercial business revenue was 2,244 billion yuan, an increase of 5% over the previous year.
1Q24 achieved revenue of 2,249 billion yuan, up 12.0%/17.3% month-on-month; realized net profit of 110 million yuan, corresponding to earnings per share of 0.11 yuan, a year-on-year change of -3.4%/-14.5%, in line with our expectations. Vitamin prices picked up in 1Q24, driving gross margin up 4.6ppt to 32.0% month-on-month.
Development trends
Currently, vitamin A and E prices have bottomed out and rebounded. According to Wind, the average domestic market price of vitamin A (500,000 IU/g) is currently 85 yuan/kg, and the average price of vitamin E (50%) market is 70 yuan/kg. Compared with the 4Q23 low of 71.5 yuan/kg and 57 yuan/kg, the company believes that the overall profit of the vitamin A industry is currently low. Although the supply and demand pattern is good, the price of vitamin E is also at a low level due to weak downstream demand. We believe that the current profit level of vitamins A and E is picking up, and we are waiting for the recovery in vitamin demand due to the recovery in feed demand.
Companies in the pharmaceutical manufacturing sector are steadily advancing industrial restructuring and sorting out R&D pipelines. In 2023, Xinchang Pharmaceutical Co., Ltd. completed the US DMF application for pharmaceutical-grade fish oil, continued to promote the production and market development of Taijiexin capsules and injections; innovative biotechnology steadily promoted the construction of a new formulation base and began export sales of pharmaceutical products; the ARX-788 clinical phase III study of Xincode Biotech's product under development met the efficacy standards set by mid-term analysis. ARX-305 continued to advance clinical phase 1 research, and NCB003 obtained clinical trial approval. Looking back, we believe that the gradual release of new products in the pharmaceutical sector is expected to drive the company's long-term growth.
Profit forecasting and valuation
Due to innovative drug development falling short of expectations and low vitamin prices, we lowered our 2024 profit forecast by 49% to $467 million and introduced a profit forecast of 636 million yuan for 2025. The current stock price corresponds to 19.6/14.4 times the price-earnings ratio for 2024/25. Due to lowering the profit forecast but considering the company's long-term growth, we lowered our target price by 15% to 11 yuan, corresponding to 23 times the price-earnings ratio in 2024, 17 times in 2025, and an upward margin of 16%, maintaining the outperforming industry rating.
risks
Vitamin A/E competition has intensified, and the development of innovative drugs has fallen short of expectations.