Incident: On April 26, 2024, the company released the 2023 annual report and the 2024 first quarter report. In 2023, the company achieved operating income of 3,931 billion yuan, an increase of 5.89% over the previous year, and net profit to mother of -189 million yuan, which changed from profit to loss; 2024Q1 achieved operating income of 1,004 billion yuan, a year-on-year decrease of 23.19%, and net profit to mother of 177 million yuan, a year-on-year decrease of 46.68%.

The API sector was under pressure for a short period of time, and the pharmaceutical export business continued to pay off. By business, the company's revenue contribution in 2023 was 997 million yuan, down 10.12% year on year, revenue share was 25.37%, gross margin was 33.63%, down 6.9pct year on year, gross profit ratio was 17.63%, down 5.49pct year on year. The heparin API business accounted for less than 30% of revenue from 2019 to less than 30% in 2023. The formulation sector achieved revenue of 2,772 billion yuan, an increase of 12.75% over the previous year, of which overseas pharmaceutical sales revenue exceeded 1.9 billion yuan, an increase of more than 25% over the previous year. The US subsidiary Meitheal achieved revenue of 1.63 billion yuan, an increase of 37.7% over the previous year, and the company's pharmaceutical export business continued to deliver. The overall gross margin of the 2024Q1 company was 38.49%, down about 12.18 pcts from the same period last year. It is estimated that the main reason is that the current price of heparin APIs is at a historically low level, the reduction in domestic preparation collection prices, and the increase in the cost of overseas heparin preparations. Since 2023H2, downstream heparin companies have faced the current situation of inventory removal. The company's orders for heparin APIs have plummeted, and the price of 24H2 heparin APIs is expected to slowly recover. Domestic preparation collection began at 23H2, and the company will be in a low base in the second half of the year. Overseas heparin preparations will further increase their market share, while non-heparin preparations will still be rapidly released, and 24H2-25H1 will be marketed with large single products such as white purple, liraglutide, and glatiramer, providing a stronger profit margin for overseas pharmaceutical export business.

Continue to promote innovation and transformation, and gradually establish the image of a macromolecular pharmaceutical company through cooperation+self-research. In 2023, the company invested 590 million yuan in R&D, accounting for 15.02% of revenue, an increase of 89.53% over the same period last year. In 2023, the company's 10 drugs were approved by the US FDA, including bupivacaine hydrochloride injection and proxafil injection, and other products with a market share of more than 100 million US dollars; the company's R&D center has established a controlled-release injection technology platform, a liposome technology platform, and an automated drug delivery technology platform. Currently, 1 complex formulation product is being approved in the US and 1 product is being approved in China; the company is also promoting 4 biosimilar drug projects, among which The MAB22 project has completed pre-clinical pharmacy work, and the insulin series project has completed stability studies. We expect to be approved for listing in the US in 2026; in addition, the company's cooperative approach quickly promoted the R&D of the second clinical phase of the orphan drug XTMAB project, and successfully built a self-replicating mRNA and lipid nanoparticle process research platform and a pre-clinical pharmacological efficacy and toxicology testing platform for mRNA biopharmaceuticals, and independently developed multiple indications for an innovative drug. The company realizes two-wheel drive for generic drugs and innovative drugs in the product hierarchy, continuously enriches the dosage forms and types of existing products, and improves the company's product structure. As the company's pipeline continues to expand, the company has operated more than 50 products in the US market by the end of 2023, making it one of the most complete suppliers in the US injection sales pipeline.

Investment advice: The company has successfully transformed from a heparin API company to high-end formulations. As an excellent platform enterprise for domestic pharmaceutical companies to export overseas formulations, the growth prospects are broad. Due to the increase in the cost of the company's heparin formulation products, we lowered the company's profit forecast for 2024. The company's net profit for 2024-2026 is 9.18/12.70/1,642 billion yuan, an increase of 584.75%/38.25%/29.37% year-on-year. The current stock price corresponding to 2024-2026 PE is 23/17/13 times, maintaining the “recommended” rating.

Risk warning: the risk that rising raw material prices will affect the gross margin of the product, the risk that exchange rate fluctuations will affect the company's exchange earnings, the risk that downstream demand will not recover as expected, and the risk that R&D progress falls short of expectations.