Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 2,896 million yuan (-19.75%), net profit attributable to mother of 313 million yuan (-55.86%), deducted non-net profit of 316 million yuan (-55.46%), and operating cash flow of 902 million yuan (+6.91%). 2023Q4 achieved operating income of 781 million yuan (-12.29%), net profit attributable to mother of 44 million yuan (-59.14%), and deducted non-net profit of 41 million yuan (-61.64%). 2024Q1 achieved operating income of 616 million yuan (-8.88%), net profit to mother of 120 million yuan (+3.05%), deducted non-net profit of 118 million yuan (-2.00%), and operating cash flow of 205 million yuan (-97.08%).

High base, divestment of agency services, and impairment accruals affect apparent performance. The company's apparent revenue and profit declined sharply in 2023. On the one hand, due to sales of COVID-related molecular products in the same period in 2022, the revenue base was high, and on the other hand, the further divestment of the agency business affected the absolute amount of revenue and profit to a certain extent. In addition, impairment charges (asset impairment loss of 58 million yuan plus credit impairment loss of 36 million yuan) also had a negative impact on the profit side. Since 2023, the company's business structure has continued to be optimized, leading to the restoration of gross margin in 2023 (55.27%, +1.05pct) and a further increase in 2024Q1 (57.41%, +2.14pct).

Independent products: Achieved revenue of 1.88 billion yuan (-18.67%) in 2023, accounting for 64.94% of revenue, gross profit margin of 74.64% (+2.87pct), profit contribution of 85.95%, including sales of immunological reagents of 952 million yuan (+18.68%), sales of biochemical reagents of 577 million yuan (+2.54%), sales of clinical testing reagents of 176 million yuan (+27.38%), molecular diagnostic reagents increased 1% year-on-year. 2024Q1 Among them, immunization revenue +5% (number of tests +22%), clinical examination revenue +26% (number of tests +61%), and biochemical revenue -7% (number of tests +20%). The increase in the number of tests far exceeds revenue, mainly due to the promotion of direct sales to distribution and implementation of collection policies.

Agency products: In 2023, revenue of 981 million yuan (-21.87%) was achieved. 2024Q1 decreased 25% year-on-year, and the agency business volume was further reduced. Based on the company's active adjustment of the business structure starting in 2022, the gradual divestment of the agency business is in line with the company's overall strategic plan to drive growth through self-produced product business.

The light-emitting instruments and assembly lines were installed smoothly, driving the growth of the self-produced reagent business. The company vigorously promotes the three major laboratory platforms (biochemical/immunology/clinical testing integrated products) and provides flexible laboratory intelligent analysis lines. In 2023, the company shipped 4,016 units (pieces) of large-scale instruments and assembly lines from the market, including 189 free assembly lines, 162 blood lines, 1,458 chemiluminescence instruments, and 1,369 blood instruments. We believe that the acceleration of instrument installation is expected to drive rapid growth in the company's reagent sales in the future.

A number of R&D achievements have been launched intensively, and the competitiveness of the core business is increasing day by day. In 2023, the company invested 414 million yuan (+22.34%) in R&D, 1,172 R&D personnel (+149), and added 64 domestic product registration certificates (total 512 items, 27 instruments and 485 reagents). The company launched a LABAS MIX all-laboratory intelligent assembly line, which can achieve high integration of ten major functions such as automatic quality control, multi-mode sampling, automatic centrifugation, sample quality monitoring, one-click extraction, classification and filing. It can be connected to modules such as blood analysis, thrombosis and hemostasis analysis, etc. Complete and centralized testing, and process remodeling for automatic review, intelligent review, and automated inspection through intelligent software, have comprehensively enhanced the competitive strength of the company's comprehensive products. In addition, in 2023, the company added 19 supporting reagent product registration certificates to the acridine ester direct chemiluminescence technology platform, and has obtained a total of 102 (covering tests for diseases such as thyroid function, infectious diseases, myocardium, tumor markers, anemia, inflammation, autoimmune diseases, reproductive hormones, and bone metabolism).

Investment advice: The company is a leading IVD enterprise with leading technical strength and comprehensive product layout. The rapid implementation of high-speed machines and assembly line solutions provides the company with long-term growth impetus. Considering changes in the industry's business environment, we lowered the company's 2024-2026 net profit forecast to 4.51/564/697 million yuan, up 44.24%/24.99%/23.67% year over year, and EPS per share was 0.74 yuan, 0.92 yuan, and 1.14 yuan respectively. The current stock price corresponds to 17/14/11 times PE 2024-2026, maintaining the “recommended” rating.

Risk warning: the risk that the price reduction for chemiluminescence reagent collection exceeds expectations, the risk that assembly line installation will not progress as expected, and the risk that the amount of reagent will fall short of expectations.