Core views

The company's 2023 annual report was in line with expectations, and the 24Q1 profit growth rate exceeded expectations. In the second quarter of 2024, despite being affected by increased compliance requirements in the medical industry and the continued promotion of policies such as DRG/DIP medical insurance fee control, we expect steady growth in 24Q2 and throughout the year as the company's high-speed aircraft and assembly line installation progresses steadily, and the growth rate in the second half of the year is expected to be higher than in the first half of the year. At the same time, with the implementation of chemiluminescence harvesting in Anhui, it is expected that the company's short-term performance will be disrupted. However, in the long run, the continued promotion of mining is expected to accelerate domestic substitution, and the company's share is expected to increase further. At the same time, the company continues to lay out in new fields such as genetic sequencing, coagulation, and mass spectrometry, and is optimistic that the future platform-based layout will provide long-term development impetus for the company.

occurrences

The company released its 2023 annual report and 2024 quarterly report

In 2023, the company achieved operating income of 4.444 billion yuan, a year-on-year increase of 0.05%; net profit to mother was 1,217 billion yuan, an increase of 4.28%; net profit after deducting non-return to mother was 1,185 billion yuan, an increase of 5.86% year-on-year. Basic earnings per share were 2.10 yuan/share. The 2023 profit distribution plan is to distribute a cash dividend of 10.5 yuan (tax included) for every 10 shares to all shareholders.

In the first quarter of 2024, the company achieved operating income of 1,089 million yuan, a year-on-year increase of 5.09%; net profit to mother of 324 million yuan, an increase of 33.93% year on year; net profit after deducting non-return to mother was 314 million yuan, an increase of 33.15% year on year. Basic earnings per share were 0.56 yuan/share.

Brief review

The results of the 23 annual report were in line with expectations, and the 24Q1 profit growth rate exceeded expectations

In 2023, the company achieved operating income of 4.444 billion yuan, an increase of 0.05% year on year; net profit after deduction of 1,217 billion yuan, up 4.28% year on year; net profit without return to mother was 1,185 billion yuan, up 5.86% year on year. The 2023 results were in line with expectations. The slowdown in revenue and profit growth was mainly due to the high base in 2022, and regular business achieved steady growth. By product line, immunodiagnostic products achieved revenue of 2,483 billion yuan in 2023, up 23.77% year on year, microbiological testing products achieved revenue of 323 million yuan, up 18.65% year on year, biochemical testing products achieved revenue of 250 million yuan, up 20.54% year on year, molecular diagnostic products achieved revenue of 17.38 million yuan, a year-on-year decrease of 79.18%, and testing instrument revenue of 302 million yuan, a decrease of 30.47% year on year, mainly due to a sharp decrease in the company's fully automatic PCR instrument market demand in 2023.

By region, the company's domestic revenue in 2023 was 4.159 billion yuan, down 1.82% year on year, and overseas revenue was 209 million yuan, up 60.53% year on year. The company continued to increase investment in overseas markets in recent years. By the end of 2023, more than 120 dealers had established long-term friendly cooperative relationships, and the overseas market is expected to maintain a high growth trend in the future.

In the first quarter of 2024, the company achieved operating income of 1,089 million yuan, a year-on-year increase of 5.09%; net profit to mother of 324 million yuan, an increase of 33.93% year on year; net profit after deducting non-return to mother was 314 million yuan, an increase of 33.15% year on year. The revenue side was slightly lower than expected. It is expected that due to the recovery in in-hospital medical treatment volume in 23Q1, the multiple effects of high base figures, increased compliance requirements in the medical industry, and continued promotion of policies such as DRG/DIP health insurance fee control. The profit side growth rate exceeded expectations, mainly due to the high depreciation of inventory assets last year, which led to a low profit side base, and as the share of independent products such as chemiluminescence increased, gross margin increased significantly.

It continues to maintain a high investment in R&D, and the product line continues to be rich. The products under development are about to enter the harvest period. The company has continued to maintain a high R&D investment in recent years, improving the technology research and development system centered in Zhengzhou, with R&D centers in Beijing, Shanghai, Shenzhen, Suzhou and North America as branches. In 2023, the company invested 656 million yuan in R&D, an increase of 15.42% over the previous year. The R&D expenditure rate was 14.77%, an increase of 1.97 percentage points over the previous year. In terms of reagent research and development, the company has obtained 60 new product registration (filing) certificates, covering testing projects for autoimmune diseases, heart-related diseases, etc., and the company's testing menu has been further enriched.

In terms of the layout of the NGS product line business, in 2023, Sikun Biotech, a wholly-owned subsidiary of the company, completed the production trial production and application testing of the sequencing system. The Sikun 2000 series of genetic sequencers was launched in the non-clinical field, and the sequencing kit was approved at the same time. In terms of mass spectrometry research and development, in 2023, the company achieved prototype development for a new time-of-flight mass spectrometry project. The nucleic acid mass spectrometry registration process is progressing steadily. At the same time, mass spectrometry quality control products have been launched, and drug sensitivity kits have entered the pilot phase. The development of the company's triple quadrupole liquid-quality combined system is progressing steadily according to the plan. Performance testing and inspection of the mass spectrometry system have been completed in 2023, and the progress is in line with expectations. The company is expected to launch a number of major products over the next 1-2 years.

In terms of integrating production lines, the company actively lays out coagulation and other fields. In 2023, the company's partner Hiken Medical's fully automatic coagulation analyzer AutoCimoc6000 was approved, which can form a full range of immuno-biochemical-coagulation testing lines. Furthermore, the company invested in and participated in Meili Technology to accelerate the development of related gene sequencing technology and product implementation. With the continuous improvement of the company's product matrix, it is expected to open up the company's long-term growth ceiling.

Continued installation of assembly lines and high-speed machines is expected to consolidate the leading position in the industry. The international layout will gradually improve the company's high-speed luminescence meter Autolumo A6000 and automated assembly line Autolas X-1. The company's instrument sales policy has been adjusted since 2023Q3, and the installation of high-speed luminescence meters continues to accelerate in the second half of 2023, which is expected to further promote domestic replacement of chemiluminescence projects in tertiary hospitals. The company has formed a complete marketing network in China, with more than 1,000 distributors. By the end of 2023, the company's products had reached more than 6,700 end users in level-II hospitals and above, including more than 2,200 level-III hospitals, accounting for 61.90% of the country's total tertiary hospitals. It is expected to continue to consolidate the company's leading position in domestic chemiluminescence and other fields in the future.

In terms of the international market, the company has accelerated the pace of international development in recent years. The products have entered various regions such as the Middle East, Asia, Europe, America, Africa, etc., and the company has restructured the international trade and cooperation center to form an operating model of “regional management, customer service management, market leadership, compliance first, and comprehensive management”. By the end of 2023, more than 120 dealers had established long-term friendly cooperative relationships. Currently, the overseas revenue base is still low, and the overseas market is expected to maintain a high growth trend in the future.

Looking ahead to the second quarter and the whole year, core businesses such as chemiluminescence are expected to maintain steady growth. The growth rate in the second half of the year is expected to be higher than in the second quarter of 2024 in the first half of the year. Although affected by increased medical industry compliance requirements and continued promotion of policies such as DRG/DIP medical insurance fee control, we expect the 24Q2 revenue side to maintain steady growth with the steady progress of the company's high-speed aircraft and assembly line installations. Looking ahead to the whole year, the impact of increased industry compliance requirements on equipment bidding is expected to gradually weaken. As the company's assembly line and high-speed machine installation progresses steadily, the company's core businesses such as chemiluminescence are expected to maintain steady growth. Considering the relatively lower base for the second half of last year, the growth rate in the second half of the year is expected to be higher than in the first half of the year. As the share of revenue from the company's independent products such as chemiluminescence increases, the company's overall gross margin is expected to increase, and the company's profit growth rate in 2024 is expected to be higher than the revenue growth rate.

There was a slight increase in gross margin in 2023 and 24Q1. Other financial indicators are basically normal. The comprehensive gross margin of the company's main business in 2023 was 65.07% (+5.23pp), with a reagent gross profit margin of 70.94% (+4.36pp), which is expected to be mainly due to an increase in the share of independent products with high gross margins. The gross profit margin of instruments is 33.54% (-3.18pp), mainly due to the decline in revenue from molecular diagnostic instruments with high gross margins. The company's annual sales expense ratio is 17.18% (+1.02pp), which is expected to be mainly due to the increase in employee remuneration and travel expenses in 2023. The management expense ratio is 4.13% (+0.43pp), the R&D expense ratio is 14.77% (+1.97pp), and the financial expenses ratio is 0.20% (+0.25pp). The various expense ratios remain stable. The company's net operating cash flow in 2023 was 1.47 billion yuan (-5.68%), and net cash flow from financing activities was -337 million yuan (-218 million yuan in the same period last year), mainly due to the impact of repayment of maturing letters of credit business. The company's accounts receivable turnover in 2023 was 89.35 days, an increase of 6.63 days over the previous year, and the number of inventory turnover days was 177.49 days, an increase of 42.1 days over the previous year, which is expected to be mainly due to increased preparation of raw materials. The rest of the financial indicators are generally normal.

In the first quarter of 2024, the company's gross sales margin was 64.52% (+3.46pp), mainly due to the increase in revenue share of independent products. 24Q1 The company's sales expenses ratio is 16.60% (+0.15pp), management expenses ratio 4.27% (-0.20pp), R&D expenses ratio 13.88% (-0.83pp), and financial expenses ratio 0.19% (+0.11pp). The various cost rates have remained stable. The company's net operating cash flow in 2024Q1 was $328 million (+61.21%), mainly due to increased sales repayments. The company's accounts receivable turnover days for the first quarter of 2024 was 93.38 days, an increase of 4.33 days over the previous year, and the number of inventory turnover days was 187.66 days, an increase of 27.15 days over the previous year. The rest of the financial indicators are generally normal.

Leading domestic IVD platform-based companies are optimistic about the company's medium- to long-term development. With the steady progress of the company's high-speed luminescence meters and self-developed assembly line installations, it is expected to drive the company's expansion in medium and large medical terminals. At the same time, with the implementation of chemiluminescence collection in Anhui, it is expected to disrupt the company's short-term performance. However, in the long run, the continued promotion of mining is expected to accelerate the replacement of domestic production, and the company's share is expected to increase further. At the same time, the company continues to lay out in new fields such as genetic sequencing, coagulation, and mass spectrometry, and is optimistic that the future platform-based layout will provide long-term development impetus for the company. We expect the company's revenue for 2024-2026 to be 51.74, 63.04, and 7.630 billion yuan respectively, with year-on-year growth rates of 16.43%, 21.84% and 21.03% respectively, and net profit to mother of 1,492 billion yuan, 17.97 billion yuan, and 22.27 billion yuan respectively, with year-on-year growth rates of 22.52%, 20.48% and 23.90% respectively. Maintain a “buy” rating.

Risk analysis

1) Impact of increased medical compliance requirements: Policies such as increased compliance requirements in the medical industry may delay the bidding process, leading to a decrease in the number of instruments installed, which in turn affects reagent output.

2) Procurement policy risks: Jiangxi Province and Anhui Province respectively took the lead in carrying out centralized volume procurement of biochemical diagnosis and chemiluminescence reagents. The company's factory price is expected to be affected to a certain extent. If the share cannot be increased, it will affect the revenue and profit margin level of the company's products.

3) Market competition intensifies risk: There are many manufacturers in the IVD industry, and industry competition is gradually intensifying. It is not ruled out that some manufacturers will cut prices to expand their market share, which will affect the company's market share, leading to further intensification of industry competition.

4) Risk that R&D and registration progress will fall short of expectations: The company's various product line instruments still need to be continuously updated and iterated. Sequencing and triple four-stage products are still being developed. There is uncertainty about the development progress of the company's instruments and reagents, which may have a certain impact on the company's performance.