Incident: The company released its 2023 annual report and 2024 quarterly report, of which: 1) In 2023, the company achieved operating income of 556 million yuan (YOY +31.19%); net profit to mother of 24 million yuan (YOY -12.04%), lower than our previous expectations. 2) In 24Q1, the company achieved operating income of 167 million yuan (YOY +62.08%) and net profit to mother of 0.17 million yuan (YOY +40.67%), which slightly exceeded our previous expectations.
Comment:
The clinical business is developing steadily, and Chinese medicine orders are growing rapidly: In 2023, the company's clinical research service revenue was 415 million yuan (YOY +49.58%), and the additional clinical research service contract amount was 942 million yuan (YOY +49.25%), and the clinical business maintained rapid growth. The total amount of new business contracts added by the company in '23 was about 1,165 billion yuan (YOY +38.12%), and the amount of traditional Chinese medicine R&D service contracts increased 347% year-on-year to 372 million yuan, indicating that the company's R&D capabilities in traditional Chinese medicine were recognized by customers, and the traditional Chinese medicine business entered a stage of rapid development. By the end of '23, the company had executed orders of 2,095 billion yuan, which can support the steady development of the company's business.
Pre-clinical business is under pressure, and gross margin needs to be improved: in 2023, the company achieved revenue of 78 million yuan (YOY +6.19%) and an additional contract amount of 163 million yuan (YOY +13.12%). The slowdown in revenue growth was mainly affected by weak domestic biomedical investment and financing. The company's overall gross margin in '23 was 33.3%, down 4.6pp from '22, mainly due to: 1) the gross margin of the pre-clinical business decreased by 9.39pp to 19.8% year over year; 2) the gross margin of other consulting services decreased by 12.2pp to 52.4% year over year. The decline in gross margin was mainly due to an increase in labor costs in the above two businesses.
Various expense ratios were improved in 24Q1, and the growth rate of new orders was impressive: 24Q1 company's expense ratios were improved. The sales expense ratio/management expense ratio/R&D expense ratio were 6.52%/8.74%/6.77%, respectively, compared to 6.87%/14.08%/9.67% for the same period in '23, respectively. In 24Q1, the company added 398 million yuan in business contracts, an increase of 135% over the previous year. As the company's revenue volume grows rapidly, various expense ratios have improved, and the company's profit margin will gradually increase.
Profit forecasting, valuation and rating: The company's traditional Chinese medicine research and development services are unique, and its clinical CRO service capabilities are in the first tier in China. Considering the improving trend in the company's various expense ratios and the rapid growth in Chinese medicine service orders, we raised our 24-25 net profit forecast to 0.70/099 million yuan (up 5.2%/12.5% from the previous period) and added the 26-year net profit forecast to 128 million yuan. The current stock price corresponds to PE of 40/28/22 times, and the valuation is within a reasonable range and raised to an “overweight” rating.
Risk warning: risk of failure in the development of new drugs; compliance risk of extended trial cycles; risk of market competition