Key points of investment

Performance: Q1 improved month-on-month, and losses narrowed sharply

2023: Achieved revenue of 1,366 million yuan, YOY -17.68%; net profit attributable to mother -0.33 million yuan, YOY -109.82%; net profit after deducting non-attributable net profit of -58 million yuan, YOY -118.76%.

2024Q1: Revenue of 260 million yuan, YOY - 42.51%, QOQ 42.24%; net profit to mother - 38 million yuan, YOY -136.98%; net profit after deduction of non-return to mother - 40 million yuan, YOY -140.77%, a sharp decrease in month-on-month losses.

By business segment: In 2023, the drug discovery and pharmaceutical research business achieved revenue of 632 million yuan, YOY -14.07%, gross profit margin of 15.92%, YOY -17.03pcts; the pre-clinical research sector achieved revenue of 734 million yuan, YOY -20.55%, gross profit margin of 30.53%, and YOY -16.50pcts.

Growth capacity: Overseas base put into operation, personnel greatly optimized

From the perspective of new orders, the company signed 2.2 billion new orders in 2023, including 968 million yuan for the drug discovery and pharmaceutical research sector and 1,232 million yuan for the pre-clinical research business. Affected by the industry climate, they all declined to varying degrees.

From a production capacity perspective, the company has put into use more than 85,000 square meters of R&D office space, including a new R&D test site in Boston, USA in 2023 to support the company's global layout. Furthermore, the company's Nanhui Park has been fully capped and applied for acceptance, which is expected to further enhance the company's new drug research and development capabilities.

From a personnel perspective, the company had 1,301 R&D personnel in the drug discovery and pharmaceutical research division and 934 R&D personnel in the preclinical research division, which was optimized for 497 and 158 people respectively from the end of 2022. We believe that taking into account changes in the industry climate, the company has dynamically optimized personnel, and cost reduction and efficiency are expected to gradually become apparent.

Expectations for 24 years: Considering the amount of new orders, staffing, industry sentiment, etc., we believe that the company's revenue side will still be under some pressure in 24, but subsequent growth and order growth are expected to be effectively improved as the innovative drug market recovers.

Profitability: Cost reduction and efficiency are gradually showing, and the gross profit margin is expected to reverse in 2024: The company's gross profit margin for the 2024Q1 single quarter was 8.33%, a sharp decline from the previous year, but there was a significant improvement from month to month.

We believe that considering the company's business cost structure and R&D personnel optimization rate, the company's overall gross margin may improve quarterly.

Expenses: 2024Q1 management costs and R&D expenses have all been significantly optimized year over month. 24Q1 sales expenses increased 45.61% year-on-year, sales expenses ratio 8.02%, YOY +4.85pcts. We believe that in the current market environment, open source and savings are the main cost planning direction, and the development of medium and large pharmaceutical companies and high-quality biotechnology companies at home and abroad may become the main direction of the company's cost growth in 24 years.

Impairment: In 2023, the company accrued asset impairment losses and credit impairment losses of $61.383 million.

Cash flow: Improved control of accounts receivable

In 2023, the net cash flow from operating activities was $333.1886 million, an increase of $54.6494 million over the same period last year, mainly due to significant improvements in accounts receivable and inventory value added. Judging from the 2023 Annual Report and 24Q1 Quarterly Report trends, we believe that the company is further controlling accounts receivable risk, and future cash flow is expected to be gradually optimized.

Profit forecasting and valuation

Considering the overall boom in the industry, order execution cycle, and changes in the company's market expansion strategy, we predict that the company's gross margin will still decline to a certain extent in 2024. We forecast EPS of 0.18, 0.68, 1.12 yuan/share in 2024-2026. Refer to the closing price on May 7, 2024, corresponding to 209 times PE in 2024. Maintain an “gain” rating based on comparable company valuations and industry positions.

Risk warning

The volatility of the impact of depreciation of new fixed assets, equity incentives, and exchange on apparent performance; volatility in the profit cycle of new businesses; and a decline in the investment and financing boom in innovative pharmaceuticals.