Matters:

Recently, the company released its 23 annual report and 24 quarterly report. Revenue of 4.123 billion yuan (-5.85%), net profit attributable to mother of 563 million yuan (-24.86%), net profit after deducting non-return to mother of 538 million yuan (-12.14%). 24Q1's revenue was $1,038 million (+8.42%), net profit attributable to mother was $151 million (+13.53%), and net profit after deducting non-return to mother was $145 million (+9.83%).

Commentary:

APIs: Volume increases make up for price declines, and actively practice internal skills. In '23, sales revenue of APIs and intermediates was 1.786 billion yuan (+3%), accounting for 43.32% of revenue; of these, sales revenue of major proprietary APIs was 800 million yuan (+10%), sales revenue of Italian subsidiaries was 684 million yuan (-3%), sales revenue of Xianyao Trading Company was 217 million yuan, and trade of other APIs was 0.05 billion yuan. Market competition in the API industry intensified in 2023, sales prices of non-regulated market products fell, and downstream customers removed inventory; looking at the first quarter of 2024, although API prices had a high year-on-year base, the company relied on its competitive advantage to make up for the price decline through sales volume growth. In the first quarter of 2024, the company sold 238 million yuan of proprietary APIs, an increase of 1.8% over the previous year; Newchem's revenue was 150 million yuan, which affected a 9% decline in revenue during the same period.

It is worth noting that in the past year, the company: 1) the Yangfu API and formulation plant passed FDA certification with zero defects, 2) the sterile raw materials for medroxyprogesterone acetate passed WHO certification, 3) obtained a silver medal in the EcoVadis rating, and the company's competitive advantage continues to increase. After 24 years, the company's API business is expected to achieve steady growth after the price of non-regulated products bottomed out and downstream customers basically finished inventory removal.

Formulation side: Formulations were under pressure due to collection in '23, and sales adjustments in the first quarter of '24 showed initial results. In 2023, pharmaceutical sales revenue was 2.278 billion yuan (-12%), of which sales revenue of proprietary pharmaceutical products was 2.09 billion yuan (-15%). By sector, the company's gynaecology and family planning revenue is 445 million yuan (-18%), anesthetic muscle relaxation revenue is 100 million yuan (-80%), respiratory revenue is 672 million yuan (-1%), dermatology products are 197 million yuan (+9%), and general medicine revenue is 678 million yuan (+27%). Due to the collection of varieties such as progesterone capsules and rocuronium bromide injections in '23, it had a great impact on the formulation business. However, judging from the situation in the first quarter, the company's formulation revenue was 570 million yuan, an increase of 13% over the previous year. We think this reflects: 1) Currently, the negative impact of collection on the company's formulation business has basically been cleared; 2) the adjustments in the company's formulation sales system are also beginning to bear fruit. Looking ahead to 2024, the company's sales system and sales channel adjustments will be basically completed, and various new products (gynecology, anesthesia, etc.) will continue to be released, and domestic formulations are expected to continue to contribute to the company's good performance.

Profit forecast, valuation and investment rating: Due to changes in the industry environment such as increased competition for APIs and price declines, we adjusted the company's net profit for 2024-2026 to 6.72, 8.35, and 1,037 million yuan (the previous 24-25 forecast values were 747 million yuan and 869 million yuan), up 19.3%, 24.3%, and 24.1% year-on-year, and EPS was 0.68, 0.84, and 1.05 yuan, respectively. The current stock price corresponding to 2024-2026 PE is 18, 14, and 11 times, respectively. Considering the company's clear and rapid growth prospects, as well as the natural advantages of high barriers, few players, and large space on the steroid track, we believe that a higher valuation level should be appropriately given. Referring to comparable company valuations, 25 times PE for 2024, corresponding to a target price of 17 yuan, maintain a “strong” rating.

Risk warning: The company's new drug registration approval process fell short of expectations, the company's sales volume of old pharmaceutical ingredients did not meet expectations, the CDMO business customer development situation did not meet expectations, and industry competition intensified.