Incident: The company released its 2023 annual report and 2024 quarterly report. Net profit for 2023 was 4.123 billion yuan, down 5.85% year on year, net profit of 563 million yuan, down 24.86% year on year, after deducting non-net profit of 538 million yuan, down 12.14% year on year; revenue for the first quarter of 2024 was 1,038 million yuan, up 8.50% year on year, net profit of 151 million yuan, up 9.83% year on year.

Under pressure in the 2023 phase, 24Q1 bucked the trend. The risks of collection have been fully cleared, the release of new products can be expected, and we are optimistic about future development. The decline in revenue in 2023 is mainly due to 1) the decline in revenue from rocuronium bromide injections (national collection) and progesterone capsules (provincial alliance collection), 2) competition in the API market intensified, sales prices of products in the non-regulated market fell, and downstream customers went into inventory. 24Q1 performance bucked the trend, which is expected to benefit from an increase in orders for APIs in the regulated market and a recovery in demand for old products; at the same time, the rapid admission volume of new formulations after domestic sales reforms. We believe that starting in '24, the company entered the dual resonance of the domestic regulatory market for new pharmaceutical products and APIs, and ushered in a new stage of growth.

Business division: Collection risks are basically clear, and new product release is expected; standardized market release of APIs can be expected.

(1) Formulations: Harvesting risks are gradually being clarified, preparation pipelines are abundant, and the release of new products is accelerated. In 2023, revenue from 2024Q1 formulations was 2,278 million yuan (-12.40%) and 570 million yuan (+13.00%), including 2.09 billion yuan (-15%) for proprietary products and 169 million yuan for the Pharmaceutical Development Department. By treatment area: 1) Gynecology and family planning: Revenue of 445 million yuan (-18%) and 123 million yuan (+15%). The collection of progesterone capsules declined due to a decline in regional alliances, mifepristone increased steadily, and the new product norethisterone enanthate injections continued to be released. 2) Anesthetic muscle relaxation: 23 and 24Q1 were 100 million yuan (-80%) and 30 million yuan (+100.00%), respectively. The collection of rocuronium bromide injections began to contribute to the collection of clean and new sugenglucose injections. 3) Respiratory: Revenue of 672 million yuan (-1%) and 180 million yuan (+28.00%), mainly due to the increase in mometasone furoate nasal spray. 4) Dermatology: Revenue of 197 million yuan (+9%) and 51 million yuan (+38%), mainly due to the increase in mometasone furoate cream. 5) Generic pharmaceutical products have sales revenue of 678 million yuan (+27%) and 160 million yuan (-8.00%), mainly due to a decrease in revenue after collection of dexamethasone sodium phosphate injections. 6) Revenue from other outsourced agency products was 0.17 billion yuan.

(2) APIs: Under pressure for 23 years; the factory area has passed FDA certification, and standardized market orders can be expected. In 2023, revenue from APIs and intermediates was 1.786 billion yuan (+3%), of which proprietary APIs were 888 million yuan (+10%), Italy's Newchem revenue was 684 million yuan (-3.00%), Xianyao Trading was 217 million yuan, and other API trade was 0.05 billion yuan. Revenue from 2024Q1 APIs and intermediates was 465 million yuan (+3%), of which self-operated APIs were 238 million yuan (+1.8%), and Newchem's revenue was 150 million yuan (-9%). The year-on-year decline was mainly affected by last year's high Q1 base, and trade in other APIs was 76 million yuan. As prices in the non-regulated market stabilize, the company reduces costs and increases efficiency, implements production capacity, and actively explores standardized market orders, the API sector is expected to inject continuous impetus into performance growth.

Expense ratio: The gross margin fluctuated slightly. The cost ratio was basically stable during the period, and R&D continued to grow. Gross profit margin: 2023/24Q1 gross margin was 52.88% (-5.27pp), 55.11% (+2.76pp). Expense rate: 2023/24Q1 sales expense ratio was 24.01% (-4.82pp), 24.64% (+1.54pp), management fee ratio 6.82% (+0.66pp), 7.94% (+0.47pp), financial expense ratio -0.54% (+0.07pp), -0.56% (-0.42pp), the total three cost rates were 30.29% (-4.09pp), 33.02% (+1.59pp). The decrease in 24Q1 sales expenses rate was mainly due to reduced marketing fees. R&D investment: In 2023 and 24Q1, R&D expenses were 261 million yuan (-2.16%) and 685,500 yuan (+65.73%), accounting for 6.33% (+0.24pp) and 6.60% (+2.28pp) of revenue, and R&D investment continued to grow.

Profit forecast and investment suggestions: Based on the annual report and quarterly report, considering the impact of collection and the pace of new product release, we adjusted the profit forecast. The company's revenue for 2024-2026 is 46.48, 53.84, and 6.237 billion yuan (51.25 billion yuan, 5.979 billion yuan before the 24-25 adjustment period), up 12.73%, 15.84%, and 15.83% year-on-year; net profit to mother of 6.84, 8.45 and 1,040 million yuan ($8.50 and 1,063 million before adjustments in 24 and 25), year-on-year increase 21.5%, 23.5%, and 23.1%. The current stock price is 18/14/12 times the 2024-2026 PE. Considering that the company is a leading integrated API formulation leader in the high-quality steroidal hormone circuit. Currently, the double resonance of entering the domestic regulatory market for new formulation products and APIs has ushered in a new stage of growth and maintained a “buy” rating.

Risk warning events: risk of product price reduction, risk of exchange rate fluctuations, risk of failure in overseas acquisition integration, risk of delays in public data information or untimely updates.