Key points of investment

Performance: Performance continues to be under pressure due to share payment fees and industry environment 2023A: The company achieved revenue of 587 million yuan, YOY -16.86%; net profit to mother of 68.57 million yuan, YOY -75.08%; net profit after deducting non-return to mother of 31.59 million yuan, YOY -83.97%. Excluding the revenue impact of magnetic bead products used for nucleic acid testing in 2022, the company's revenue fell 7.59% year on year; if the impact of two factors, such as share payments and investment income from the acquisition of Spectrum instruments in the same period last year, the company's net profit to mother was 162 million yuan, or YOY -41.90%.

2024Q1: The company achieved revenue of 154 million yuan, YOY +16.64%; net profit attributable to mother of 16.89 million yuan, YOY +36.66%; net profit after deducting non-return to mother of 13.53 million yuan, YOY +126.08%.

Growth: Optimistic about new demand, new strategy support 2024 will usher in an inflection point of growth. We believe that under the influence of the continuous emergence of emerging demand, support for the company's new product and technology reserves, sales system optimization, and product business collaboration brought about by continuous horizontal mergers and acquisitions, the company's main business is expected to usher in a growth inflection point in 2024. Specifically, in 2023, the company's main business, chromatographic fillers and chromatography media, achieved revenue of 409 million yuan, YOY -9.52%. According to product breakdown, chromatographic interpretation applied to four types of macromolecular products, including antibodies (including ADC), recombinant proteins, vaccines, and nucleic acid drugs, achieved revenue of 250 million yuan, YOY -14.4%; while chromatographic filler products applied to four types of small molecules, including insulin, polypeptides, antibiotics, and contrast agents, achieved revenue of 142 million yuan, YOY +26.5%. Chromatographic fillers for polypeptide drugs, including GLP-1, achieved revenue of 67 million yuan, a significant increase of 96.4% over the previous year. According to the company's business plan, ADC, GLP-1, and blood products are the company's three key application development directions in 2024 and beyond. In terms of sales, in 2023, the company optimized the sales system, adjusted the two divisions of Large Molecule and Small Molecule to a unified regional management model, and implemented a customer-centered marketing strategy. In 2023, the company signed strategic cooperation agreements with a number of important customers. Revenue from contracted strategic customers reached 170 million yuan, accounting for 42% of the revenue from the chromatographic filler business. According to the company's business plan, the company's 2024 plan will seek to add more than 5 strategic customers for innovative drugs and increase the share of revenue from strategic customers to more than 50%.

In terms of new business collaboration, following the merger of protein chromatography equipment and spectral instruments, the company successfully merged with Fuli Instruments in March 2024 to successfully lay out solutions from chromatographic fillers and consumables to analytical instrument products, and is optimistic about the collaboration brought about by a continued rich product structure.

Profitability: High profitability continues, the impact of share payment fees gradually mitigates the continued scarcity of products, and the impact of share payment fees gradually mitigates or brings about a significant recovery in profitability. The company's gross margin was 78.07% in 2023, and the gross margin for the first quarter of 2024 was 78.58%, which is basically the same as the previous year. In terms of breakdown, the gross margin of the company's core products chromatographic fillers and chromatography media in 2023 was 83.96%, slightly lower than 0.73 pct compared to the previous year. On the supply and demand side, we believe that the domestic substitution process is accelerating, while the company's product supply continues to be scarce; on the cost side, as Changshu Nanwei and Zhejiang Nanwei gradually reach production, we expect large-scale and process optimization or high gross margins to support core products will continue. On the other hand, with the merger of Fuli Instruments in 2024, we expect it to affect the company's overall apparent gross margin or decrease slightly. In terms of expenses, the company's shares paid 105 million yuan in 2023. After excluding this part of the impact, various expenses increased slightly (sales expenses increased by 4.8%, management expenses increased by 17.7%, and R&D expenses increased by 25.8%). After 2024, we expect the impact of the company's share payments on the cost side to drop sharply, and the trend of fee rate optimization is obvious, and we are optimistic that its net interest rate will gradually recover. In terms of impairment, the company confirmed a goodwill impairment loss of 26.45 million yuan against Spectrum Instruments and Infini in 2023. We expect that under the low base in 2023, the risk of impairment of goodwill gradually weaken in the future.

Analysis of operating quality: optimistic about continuous optimization of operating cash flow

The company's net operating cash flow in 2023 was 126 million yuan, up 12.2% year-on-year. It is worth noting that the company's net operating cash flow for the first quarter of 2024 was about 9 million, the first positive quarter since 2021. We expect it to be related to the overall repayment situation of the company's strategic customers. Looking at the number of working days, the company's accounts receivable turnover days in 2023 was 131 days, a significant increase over the previous year; while the number of accounts receivable turnover days in the first quarter of 2024 was 132 days, which has been greatly optimized over the previous year. We expect that as the company continues to focus on large-scale strategic customer strategies and continues to release reserve products and technologies for emerging hot demand, its operating quality may continue to be optimized.

Profit forecasting and valuation

We anticipate that the company's profit side in 2024-2025 may be impacted by the reversal of share payment fees generated by some equity incentive plans, so we raised our previous profit forecast for 2024-2025. We expect the company to achieve operating income of 8.72/1,056/1,293 billion yuan in 2024-2026, an increase of 48.54%/21.09%/22.52%; achieve net profit due to mother of 1.56/2.17/ 334 million yuan, an increase of 127.77%/39.23%/53.81%, corresponding EPS of 0.39/0.54/0.83 yuan/share. The closing price on May 7, 2024 is 58 times PE, maintaining the “gain” rating.

Risk warning

There is a risk that new customer expansion falls short of expectations; there is a risk of performance fluctuations due to cyclical procurement from existing customers; the risk of increased market competition; the risk that new product development or progress falls short of expectations; and the risk of overseas business expansion.