Core views
The company maintained rapid revenue and profit growth in 2023, and 24Q1 profit growth exceeded expectations.
In terms of APIs, cardiovascular and anti-tumor drugs are developing rapidly. At the same time, within 23 years, the company achieved a breakthrough in the integration of active drug formulations, and didroprogesterone tablets were approved for the first prototype. The company's profitability continues to improve, operating cash flow is optimized, and a stable dividend ratio is maintained. Looking ahead to 2024, the company's formulation business is expected to continue to expand. At the same time, the company is expected to see progress in registration applications in the next 24 years. The expansion and release of new production capacity will drive good growth in the API business.
occurrences
The company released the 2023 annual report and the 2024 first quarter report and dividend plan. The company achieved total operating income of 1,263 billion yuan in 2023, an increase of 25.24%; net profit to mother was 289 million yuan, an increase of 37.19% year on year; net profit after deducting non-return to mother was 261 million yuan, an increase of 26.38% year on year.
In the 24Q1 quarter, revenue was 336 million yuan, up 11.08% year on year; net profit to mother was 82 million yuan, up 79.14% year on year; net profit after deducting non-return to mother was 82 million yuan, up 87.43% year on year.
Dividend plan: It is proposed to distribute a cash dividend of 2.2 yuan (tax included) for every 10 shares. A total cash dividend of 89 million yuan will be distributed, with a cash dividend ratio of 30.88%.
Brief review
24Q1 profit performance exceeded expectations, focusing on formulation volume and API production capacity release
Cardiovascular and anti-tumor APIs are developing rapidly. The company maintained rapid revenue and profit growth in 2023, mainly due to steady growth in the API business and new growth points in the formulation business. Looking at the API business, the better-performing sectors include: 1) cardiovascular revenue of 300 million yuan, + 26.9%; mainly benefiting from the company's good sales of epleridone and bepidoic acid, further expanding market share; 2) antineoplastic revenue of 244 million yuan, + 73.6%; mainly due to the increase in sales of APIs such as abiraterone acetate. Sectors with steady performance include: 3) respiratory revenue of 163 million yuan, +7.5%; 4) women's health revenue of 189 million yuan, -2.9%. There were some fluctuations in the performance of the two sectors, but the overall impact on the revenue side was limited: 5) Neurological system revenue of 74 million yuan, -26.7%, mainly due to competitors' price cuts having a certain impact on the company's sales in the European market; anti-infective revenue of 0.18 million yuan, -60.3%, mainly due to changes in first-line drug use for HIV treatment in Brazil, which led to a decrease in orders. The 24Q1 revenue side of the company grew steadily, and the profit side maintained a high growth rate. We expect this may be related to structural changes brought about by the rapid growth of high-margin categories.
A breakthrough was achieved in the integration of API formulations: In June 2023, the company's didroprogesterone tablets were approved by the NMPA for the first mimicry. It was also the company's first approved formulation product. Previously, the company already had didroprogesterone API products, and the approval and listing of the formulation varieties marked a breakthrough in the company's “active drug+formulation” integrated strategy. In terms of sales, the company has set up a formulation marketing team of nearly 20 people to be responsible for product promotion throughout the country. By the end of '23, the company's didrogesterone tablets had been connected to the Internet in 24 provinces and cities, and 1,058 hospitals (including community outpatient clinics) had achieved sales revenue of 89.85 million yuan in 2023. At the same time, the gross margin of the formulation category is high. The gross margin in 2023 was 87.74%, and the company's gross margin is increasing due to the volume of the formulation category.
Profitability continues to increase, and formulation promotion affects sales expenses. The company's 23-year gross profit margin was 55.92%, +4.3 pct; net profit margin 22.9%, yoy +2.25 pct; 24Q1 gross profit margin 53.68%, +8.12 pct yoy; net profit margin 24.49%, +9.36 pct; good operating quality and significant increase in profitability, mainly related to the rapid growth of high-margin API intermediates and the increase in gross margin driven by the volume of the formulation business. 23-year sales expense ratio 7.98% (+ 4.03 pct), management expense ratio 13.44% (+ 0.01 pct), R&D expense ratio 10.84% (-0.79 pct), financial expense ratio -1.3% (+ 1.44 pct), 24Q1 sales expense ratio 7.19%, +3.64 pct year over year. The increase in the sales expense ratio was mainly affected by the increase in sales expenses related to the start of sales of 23H2's first formulation product. The management cost rate and R&D cost rate remained stable. In 23 years, the company invested 137 million yuan in R&D. A total of 8 API projects have been completed, and 36 products are in the R&D stage. The products under development cover small-molecule APIs, polypeptides and oligonucleotide APIs and formulations, and future R&D progress is worth looking forward to.
Optimize operating cash flow and maintain a stable dividend ratio. The net cash flow from the company's operating activities in '23 was 386 million yuan, an increase of 132.5% over the previous year. The good operating cash flow performance was mainly due to the increase in sales cash payments due to the increase in sales volume in the current period. Net cash flow from investment activities - $365 million, compared to the same period in '22 - $257 million. The changes were mainly due to increased cash payments for the purchase of fixed assets, intangible assets and other long-term assets, and the purchase of bank term deposits. The net cash flow from financing activities was 49 million yuan, compared to -15 million yuan for the same period in '22, mainly due to increased borrowing for capital requirements in the current period. The company's dividend plan plans to distribute a total cash dividend of 89 million yuan, with a cash dividend ratio of 30.88%. In recent years, the dividend payment rate has stabilized above 30%, and continues to give back to shareholders.
Future prospects: 1) Continued release in the formulation business: The company's first formulation product, didroprogesterone tablets, was approved in '23 and achieved good sales results in '23. The company has the advantage of integrated API formulations, and channel development and sales promotion continue to advance. 2024 is the first complete sales year, and the dosage situation is worth looking forward to. At the same time, the company is expected to see progress in registration applications in the next 24 years in a number of drug product research and development bureaus. 2) Capacity expansion drives the growth of the API business: The company promoted production line project construction, expanded product categories, increased production capacity, and produced 308 tons of specialty APIs and 200 million anti-tumor products per year (including 7 APIs and 4 formulation products). By the end of '23, civil engineering for office buildings and some workshops had been completed, and some workshops had already been installed. Yangzhou Orient has completed the construction project for a production line with an annual output of 300 kilograms of simeglutide APIs and supporting facilities. By the end of '23, the construction of the API fermentation workshop plant and synthesis workshop plant had been completed. The corresponding expansion of production capacity is expected to drive good growth in the company's API business in 24-25 years.
Profit forecasting
We forecast that in 2024-2026, the company's revenue will be 1,668 billion yuan, 21.58 billion yuan and 2,773 billion yuan, respectively, up 32.1%, 29.3% and 28.5% year-on-year;
Net profit attributable to mother was $4.0 million, 5.3 million, and 680 million yuan, respectively, up 38.8%, 32.5%, and 26.9% year-on-year. Equivalent EPS was 0.99 yuan/share, 1.31 yuan/share, and 1.66 yuan/share, respectively. The corresponding PE was 24.7X, 18.6X, and 14.7X, which covered for the first time and gave a “buy” rating.
Risk warning
Risk of changes in the international trade environment. Currently, the company's products are mainly exported, accounting for more than 85% of overseas revenue. There is uncertainty about changes in the overall international trade environment and policy. If global trade frictions intensify further in the future, it may adversely affect the company's operations.
Industry competition increases risk: Currently, the company's main competitors are specialty API and formulation manufacturers in Europe, America, India, China and other countries. As market competition further intensifies, a company's failure to maintain its competitive advantage may lead to a decline in the company's profit level.
Industry policy risk: The company currently has pharmaceutical products on the market and will gradually launch more pharmaceutical products in the future. In terms of domestic industry policies, policies such as “consistent evaluation of generic drug quality and efficacy”, “drug marketing license holder system”, and “centralized volume procurement” have been introduced one after another. Currently, centralized drug procurement and medical insurance negotiations are gradually being normalized. In the future, if companies fail to adapt to these changes in industry regulations in a timely manner, it may have an adverse impact on revenue.
Sensitivity analysis: If the growth of the API business falls short of expectations and the 2024-2026 revenue falls to $1,271, 14.61, and 1,753 billion yuan, then the 2024-2026 revenue growth rate falls to 29.5%, 27.0%, and 23.7%. Corresponding net profit growth rates declined to 36.30%, 30.83%, and 23.63%.