Incidents:

On April 29, Certo Biotech released its 2023 Annual Report and 2024 Quarterly Report. For the full year of 2023, the company achieved revenue of 1,280 million yuan (-2.46%), net profit attributable to mother of 0.46 million yuan (+8.67%), and net profit after deduction of non-return to mother of 0.25 million yuan (-32.70%). The total amount of assets depreciated by the company in 2023 was 18 million yuan. In the first quarter of 2024, the company achieved revenue of 244 million yuan (-27.00%), net profit to mother of 0.3 billion yuan (-80%), and net profit after deducting non-return to mother of 0.2 billion yuan (-89.8%).

Prices of intermediates have gradually rebounded steadily, and the field of APIs has entered a harvest period:

In 2023, the company achieved revenue of 1,125 billion yuan in steroidal intermediates, down 3.29% year on year; gross margin was 23.98%, up 0.49pp year on year. In the field of intermediates, the company has five basic parent nuclei series and more than ten high-end intermediates, with a rich variety of products. At the same time, the company continues to increase the sales share of high-end intermediates with high gross profit and high added value, and the leading position in the steroid intermediates segment is expected to continue to be consolidated. At present, the price of intermediates has rebounded steadily, and it is expected that the intermediate business will resume good growth in the second half of the year. In the field of APIs, the company uses high-end respiratory specialty APIs as the research direction. Currently, it has obtained production licenses for 9 APIs, including fluticasone propionate, triamcinide, and budesonide. Among them, 4 APIs, including desonide and budesonide, are being individually reviewed, and fluticasone propionate APIs are being reviewed in connection with downstream pharmaceutical companies. In April 2024, the marketing application for desonide was approved, and the company's APIs entered the harvest period, gradually contributing to revenue and profit growth.

The construction of the formulation plant is progressing steadily, and the implementation of Silver Valley mergers and acquisitions is progressing steadily:

In 2023, the company's finished drug products achieved revenue of 100 million, an increase of 27.16% over the previous year. At present, the company has completed import registration for triamcinolone and salmon calcitonin, and the two formulations have begun to be sold domestically. In terms of production capacity, the first phase of the civil engineering project for a high-end domestic pharmaceutical factory has been completed, and the construction process is progressing steadily, laying a good foundation for the company's future large-scale production of pharmaceutical products. In March 2024, the company announced the acquisition of 60% of Yingu Pharmaceutical's shares. It is expected that the acquisition process is progressing steadily. Silver Valley Pharmaceutical has excellent R&D, production and sales capabilities, and has three pharmaceutical products (including a Class 1.1 innovative drug). Through the merger and acquisition of Silver Valley, the company is expected to quickly enter the formulation field, achieve synergy with existing businesses, and efficiently complete the extended layout of the industrial chain.

Investment advice:

Since Silver Valley's mergers and acquisitions are progressing, without considering the impact of Silver Valley on the company, we expect the company's net profit to be 0.59/0.76 billion yuan in 2024 to 2026, with corresponding EPS of 0.31/0.40/0.47 yuan, respectively. The current stock price corresponding PE is 47.20/36.55/31.06 times, respectively. We continue to recommend and give a “buy” rating.

Risk warning:

The risk of policy changes in the pharmaceutical industry; the risk that market competition increases the risk; the risk that product development and marketing progress falls short of expectations.