2024Q1 results are in line with our expectations
The company announced 2024Q1 results: revenue of 2,671 billion yuan, -2.0% year on year; net profit to mother of 231 million yuan, -33.8% year on year; operating cash flow of 746 million yuan, +40.7% year over year; in line with our expectations.
Development trends
The 2024Q1 revenue growth rate is under phased pressure, and new orders have maintained a good growth trend. Looking at 2024Q1 by sector: 1) Laboratory services: Revenue was 1,605 billion yuan, -2.9% year-on-year. The decline in revenue was mainly due to poor global biomedical investment and financing, the growth rate of customer demand slowed, 2024Q1 had some improvements over 2023Q4, new orders for 2024Q1 laboratory services increased by more than 10% year over year, overseas front-end R&D demand has entered a recovery range, and customer inquiries and visits have picked up year on year. 2) CMC (Small Molecule CDMO): Revenue of 582 million yuan, -2.7% YoY. The revenue growth rate was mainly affected by the pace of project delivery. New 2024Q1 orders increased 40+% year over year. We believe that later performance growth is more certain.
Expect profit margins to improve month-on-month. 2024Q1's profit margin is low, mainly due to one-time losses due to the closure of the Shanghai laboratory, increased costs due to the increase in the number of employees, increased production capacity conversion costs in Shaoxing, and increased financial expenses. We expect profit margins may recover in the future as the volume of revenue increases in the later stages and orders are executed one after another.
The repurchase of A-shares shows confidence. According to the company's announcement, in order to protect the company's value and shareholders' rights, the company plans to use its own funds to repurchase some of the company's RMB common stock A shares through centralized bidding transactions. The total repurchase capital is not less than RMB 200 million and not more than RMB 300 million. The company expects the number of shares to be repurchased to account for about 0.36% to 0.54% of the company's total issued share capital.
After this share repurchase, it is proposed to cancel all of them and reduce the company's registered capital accordingly.
Profit forecasting and valuation
The profit forecast for 2024 and 2025 remains unchanged. The current A share price corresponds to the 2024/2025 price-earnings ratio of 19.1 times/15.7 times. The current H share price corresponds to the 2024/2025 price-earnings ratio of 8.4 times/6.6 times. A/H shares maintained an outperforming industry rating, but due to recent systemic adjustments in the pharmaceutical sector, we lowered our target price of A shares by 12.9% to 24.90 yuan, corresponding 24.8 times the 2024 price-earnings ratio and 20.4 times the 2025 price-earnings ratio. There is 30.0% upside compared to the current stock price. Lowering the target price of H shares by 9.9% to HK$12.30 corresponds to 10.9 times the 2024 price-earnings ratio and 8.6 times the 2025 price-earnings ratio. There is 29.8% upside compared to the current share price.
risks
Risk of exchange rate fluctuations, risk of new drug development, geopolitical risk, risk of production capacity utilization falling short of expectations.