Key points of investment

Growth: Continuing high inventory turnover efficiency, optimistic about overseas expansion space. In 2023, the company's inventory turnover days were 336 days, a year-on-year decrease of 51.9 days, and the optimization trend continues. Referring to our views in the “Bide Pharmaceutical Update Report: On the Password Behind Inventory Turnover Ratio Optimization”, we believe that the reflection behind the continuous optimization of inventory turnover is Bide's product strength, customer richness, service ability, and management ability, that is, the core competitive advantage of “how fast and easy to save”. Since the current upstream boom in domestic new drug research and development is still slowly recovering, we believe that overseas expansion may become the company's main growth driver in the future, mainly supported by: ① Continued improvement of overseas warehousing layout. In 2023, the company further expanded its warehouses in the European and Indian markets, and in the future, the company plans to intelligently lay out warehouses in the US. ② According to the development strategy disclosed by the company in the 2023 report, the company will enhance the company's brand influence in the global market by building regional centers in various new drug research and development highlands around the world and strengthening the promotion efforts of BD personnel in overseas markets. ③ Core product strength continues to be strengthened. As of 2023, the number of types of molecular blocks in stock in the company has reached 112,000, continuing to close the gap with leading overseas products.

Profitability: The increase in overseas share supports gross profit margin. Optimizing the cost ratio under improving quality and efficiency, the company's gross margin in 2023 was 40%, a year-on-year decrease of 4.38pct; in breakdown, the company's gross margin for overseas business in 2023 was 48.33%, down 3.58pct year on year, and domestic business gross margin was 31.32%, down 5.92 pct year on year. Overall, the domestic gross margin decline was significantly greater than that of the overseas side. Looking at the revenue structure, the company's share of overseas revenue reached 51% in 2023, an increase of 2.38 pct over the previous year. Compared with 2021, the share of the company's overseas revenue has increased by 4.92 pcts. We believe that the company's share of overseas revenue will continue to rise, compounded by the scale effect on the product supply side, which is expected to support a bottoming out of gross margin. The company's expense ratio increased a lot during the 2023 period. We expect it to be mainly related to large personnel changes. The total increase in sales, management, and R&D expenses in 2023 was 46.9%, while the total number of employees in 2023 was 846, an increase of 37% over the previous year. In addition, due to changes in the company's strategic focus, etc., the termination of the Fengxian R&D Center project carried over profit and loss also had a transient impact on expenses.

Looking ahead, we believe that as the company's personnel structure stabilizes, the scale effect will be reflected more quickly under the asset-light model, and we are optimistic that 2024 will bring positive changes in quality and efficiency.

Operational quality: Optimization of the pace of delivery or continuous improvement in cash flow The company's net operating cash flow for the first quarter of 2024 was 48 million yuan, which is more optimized than the previous year. We expect it is mainly related to factors such as a basic complete warehousing layout and a decrease in new inventory. Looking ahead, we expect that the quality of the company's operations may continue to improve as the efficiency of global warehousing operations is gradually reflected in the overseas sales side.

Profit forecasting and valuation

As the recovery trend in global demand for innovative drug development in 2023 falls short of our expectations, changes in the competitive landscape of front-end molecular blocks may put a lot of pressure on the company's gross margin. As a result, we lowered our previous forecasts for the company's 2024 and 2025 results. We forecast the company's revenue for 2024-2026 to be 1,246, and 1,718 million yuan; we forecast the 2024-2026 net profit forecast to be 1.28, 1.68, and 211 million yuan, with year-on-year growth rates of 16.58%, 31.90%, and 25.35% respectively, corresponding EPS of 1.41, 1.85, 2.32 yuan. The closing price on May 13, 2024 is 25 times PE in 2024, maintaining the “increase” rating.

Risk warning

Risk of exchange rate fluctuations; risk of increased market competition; risk of R&D progress falling short of expectations; risk of fluctuations in global new drug development boom