Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, it achieved operating income of 6.076 billion yuan (-4.45%), net profit attributable to mother of 593 million yuan (-38.97%), deducted non-net profit of 490 million yuan (-42.44%), and operating cash flow of 70 million yuan (+10.15%). 2023Q4 achieved operating income of 1,854 million yuan (-9.04%), net profit attributable to mother of 78 million yuan (-73.37%), after deducting non-net profit of 58 million yuan (-77.07%). 2024Q1 achieved operating income of 1,361 million yuan (+4.24%), net profit attributable to mother of 243 million yuan (+21.39%), deducted non-net profit of 231 million yuan (+53.30%), and operating cash flow of 35 million yuan.

Profitability tends to recover, and the Q1 profit side exceeded expectations. 1) 2023: The company's revenue and profit side have declined, which is expected to be mainly affected by active business adjustments and intense competition in the terminal market. The annual gross profit margin is 73.32% (-3.67pct), sales expense ratio 46.78% (-1.17pct)/management expense ratio 8.10% (+1.92pct)/R&D expense ratio 7.35% (+1.24pct); 2) 2024Q1: The profit side has recovered to a high level of growth, and overall profitability has improved significantly, and gross margin has increased (75.73%, +1.95pct). It is expected to benefit mainly from the increase in the share of high-margin medical terminals and raw materials businesses. From the cost side, the company's cost control results have been remarkable, and the sales expense ratio has dropped sharply (36.04%, -10.35pct). We believe that as the cost control and efficiency strategy continues to advance, the company's cost level is expected to be further reduced during the period, which in turn will drive the continuous restoration of overall profitability.

Raw materials: Domestic and foreign business is growing steadily, and the penetration of pharmaceutical-grade raw materials is accelerating. Revenue of 1,129 billion yuan (+15.22%) was achieved in 2023, accounting for 18.59% (+3.18pct) of the company's main business revenue, and a gross profit margin of 64.71% (-6.83pct), of which sales revenue of export raw materials was 517 million yuan (+21.47%), accounting for 45.81%. Sales types and revenue of non-hyaluronic acid raw materials have achieved rapid growth. Pharmaceutical-grade hyaluronic acid raw materials with high gross margin and stable sales revenue of 401 million yuan (+18.96%) of hyaluronic acid raw materials have achieved rapid growth, mainly benefiting from the steady progress of international strategies and local operations, and the European and Southeast Asian markets have achieved rapid growth.

Medical terminals: The effects of medical and aesthetic cost control and quality improvement have been shown, and collection has promoted the penetration rate of related products. In 2023, revenue of 1,090 billion yuan (+58.95%) was achieved, accounting for 17.95% of main business revenue (+7.16pct), with a gross profit margin of 82.10% (+1.24pct), of which dermatological medical products achieved revenue of 747 million yuan (+60.29%). Revenue from the differentiated advantage category of micro-crosslinked moisturizer needles increased by more than 200% year on year, and revenue from moisturizer fillers increased by more than 250% year on year. Based on the improvement of team operation capacity and efficiency, the company's medical and aesthetic sector expenses have been further reduced. More than 3,500 new domestic institutions have been added, and the international market has sold to 15 countries including Europe, the Russian Federation, the Middle East, and America. Furthermore, with the implementation of a series of volume procurement, the company's orthopedic injection product “Hailida” achieved revenue of 205 million yuan (+35.34%), covering more than 8,000 hospitals nationwide, and achieved a total revenue of 138 million yuan (+102.49%) from other products.

Functional skin care products: Performance is under phased pressure, waiting for steady recovery after adjustment. Revenue in 2023 was 3.757 billion yuan (-18.45%), accounting for 61.84% of main business revenue (-10.61pct). The decline in sector revenue and share was mainly due to the company's phased adjustments to its major brands, striving to optimize the category system centered on large single products and deepen brand value. In 2023, the company's big single product strategy and channel structure optimization were quite effective. Runbaiyan's single product series barrier repair series accounted for 40% of Runbaiyan's overall sales revenue, and the self-operated channels of Skin Active and Miber already accounted for more than 50% of the total sales revenue of their respective brands. With the improvement of operational management efficiency, optimization of sales channels, and increased efforts to reduce costs and increase efficiency, the functional skincare business sector is expected to gradually resume rapid growth in the future, and drive the company's overall cost level down.

Investment suggestion: The company is the world's leading bioactive materials technology enterprise. It is deeply involved in synthetic biology technology, pioneering the entire industry chain layout. It is four-wheel drive with “raw materials+functional skincare+medical terminal+functional food”, rich brand matrix, and good long-term growth. Considering that the recovery in terminal consumption fell short of expectations and that the company took the initiative to slow down the growth pace of the functional skincare business, we lowered the company's 2024-2026 net profit to 8.07/10.25/1,286 billion yuan, an increase of 36.22%/27.02%/25.47% year-on-year, EPS was 1.68/2.13/2.67 yuan, and the current stock price corresponding to PE was 37/29/23 times, maintaining the “recommended” rating.

Risk warning: Risk of increased channel costs, risk of R&D progress falling short of expectations, risk of new product marketing results falling short of expectations, risk of increased market competition.