Matters:
The company released 24Q1 results, achieving revenue of 2,671 billion yuan (yoy -2.0%) and net profit to mother of 231 million yuan (yoy -33.8%). After excluding factors such as one-time losses due to the closure of the Shanghai laboratory and share-based compensation expenses, non-IFRS adjusted net profit of 339 million yuan (yoy -22.7%) to mother, which is basically in line with market expectations.
Ping An's point of view:
Revenue was generally stable in 24Q1, and gross margins of all businesses declined. 24Q1 achieved revenue of 2,671 billion yuan (yoy -2.0%), and gross margin fell 3.1 pct to 32.7% year over year. By sector, laboratory service revenue was 1,605 billion yuan (yoy -2.9%), up 0.9% month-on-month, and gross margin was basically stable at 44.1% (yoy -0.3pct). The company closed the Shanghai laboratory and integrated it with the laboratory service business in Ningbo/Beijing. It is expected that the increase in scale effect combined with improvements in human efficiency will improve subsequent gross margin; CMC service revenue of 582 million yuan (yoy -2.7%) is mainly affected by the pace of project delivery. The gross margin fell by 5.0 pct to 27.9%, mainly due to new transfers and an increase in the number of employees in Shaoxing in 23Q4; clinical research service revenue of 392 million yuan (yoy +4.6%). The gross margin fell 4.7 pct to 9.3%, mainly due to increased competition in the domestic industry and a significant decline in order amounts; the revenue of macromolecule and CGT businesses was 901 million yuan (yoy -4.1%), mainly due to the decline in revenue from testing services. Gross profit margin declined by 26.9 pct to -38.6% year over year, mainly due to an increase in the number of overseas employees.
Overseas factories expect limited loss reduction and new domestic production capacity to be put into operation, and profit margins may still be under pressure throughout the year. Since the company's overseas layout is still in the investment period and the number of employees is still increasing, the company expects a limited reduction in overall overseas losses in 2024. Furthermore, the Ningbo Macromolecule base was put into operation in early 2024. Given the differences between the macromolecule business customer base and the company's original customers, and downstream demand still needs to recover further, the first year of operation is expected to contribute limited revenue.
The order side showed signs of improvement. As 24Q1 downstream customer visits and inquiries continued to improve month-on-month, the company's 24Q1 new orders showed signs of improvement, with a year-on-year increase of 20% +. Among them, new orders for laboratory services increased 10% + year on year; new orders for CMC service increased 40% + year on year, and the capacity utilization rate of the Shaoxing factory will increase.
Maintain a “Recommended” rating. The investment and financing environment and downstream demand in the global pharmaceutical primary market still need to be further recovered. The company's front-end business orders will still be under pressure, and gross margin will be pressured in the short term due to net inflow of personnel and increased depreciation. We lowered the company's 2024-2025 EPS forecast and added the 2026 EPS forecast to 0.82, 1.14, and 1.39 yuan (the original 2024-2025 EPS was 1.13 and 1.42). Considering the steady growth of the company's mature business to provide performance guarantees, the profit quality of emerging businesses may improve and maintain the “recommended” rating.
Risk warning: 1) Production capacity construction and investment fall short of expectations: Many of the company's production capacity bases are under construction. If construction and launch progress falls short of expectations, the company's ability to accept subsequent orders may be reduced. 2) The recovery of the macroeconomic environment falls short of expectations: Failure to respond to expectations in the investment and financing environment will affect biotech's R&D and production outsourcing needs, which in turn will affect the company's performance. 3) Geopolitical risk: The company accounts for a relatively high share of overseas revenue. If overseas countries introduce restrictive policies, it will affect the company's performance.