Key points of investment

The share of pharmaceutical revenue will continue to rise in 2023, and we are optimistic about the certainty of the company's growth as the internationalization path continues to break through.

Performance: Volume and price disturbances in the API sector dragged down performance in the short term. The company achieved operating income of 3,931 billion yuan (YOY 5.89%), net profit to mother of 189 million yuan (YOY -117.37%), and net profit after deduction of 168 million yuan (YOY -115.54%), mainly affected by major changes in the heparin industry, due to the company's inventory price reduction preparations in 2023. Net cash flow from the company's operating activities increased 171.93% year over year in 2023, mainly due to the year-on-year increase in the company's sales repayments.

2024Q1 achieved operating income of 1.04 billion yuan (YOY -23.19%), net profit of 177 million yuan (YOY -46.68%), and net profit of 171 million yuan after deduction (YOY -48.12%). We believe that the decline in revenue and profit side in 2024Q1 was mainly affected by fluctuations in sales volume and price of heparin APIs.

Outlook: The share of formulation revenue continues to rise. I am optimistic that with continued breakthroughs in the internationalization path, definitive formulations will account for more than 70% of revenue. Overseas formulations are still very flexible. In 2023, the formulation achieved revenue of 2,772 billion yuan (YOY 12.75%), accounting for 70.50%; in 2023, the company's foreign formulation sales revenue exceeded 1.9 billion yuan, an increase of more than 25% over the previous year. Among them, the US subsidiary's sales revenue was 1,630 billion yuan, an increase of 37.71% over the same period last year. It is calculated that the revenue of overseas non-US formulations in 2023 was about 300 million yuan. Domestic perspective: Through calculation, the absolute value of domestic formulation revenue is around 850 million yuan. In March 2023, the company won the bid for the 8th batch of centralized procurement of enoxaparin sodium injections and natriparin calcium injections in the eighth batch of national pharmaceuticals. The company's domestic formulation sales increased by more than 25% compared to last year. International view: By the end of 2023, the company had more than 50 products in operation in the US market, making it one of the suppliers with the most complete injection sales pipeline in the US. We are optimistic about the flexibility and certainty brought about by the successive commercialization of the company and excellent domestic companies in overseas markets, such as menton, glycine, and the three types of insulin, albumin paclitaxel, etc. in overseas markets.

APIs fluctuate in the short term, and expectations of disturbances gradually weaken due to the transformation of formulation+ internationalization. In 2023, APIs achieved revenue of 997 million yuan (YOY -10.12%), accounting for 25.37%. The company's heparin API business accounted for less than 30% of total revenue in 2019 to less than 30% in 2023, reflecting the company's successful transformation from a traditional API supplier to an international sterile injectables company. CDMO and other products generated revenue of $154 million (YOY 9.58%).

Profit forecasting and valuation

Considering price fluctuations and demand-side disturbances for heparin APIs, we lowered our revenue and profit forecasts for 2024-2025. We expect the company's EPS for 2024-2026 to be 0.55, 0.73, and 0.95 yuan, respectively (the previous forecast was 0.80 yuan and 1.12 yuan for 2024-2025, respectively). The closing price on June 11, 2024 corresponds to 24x PE in 2024. We are optimistic about the scarcity of the company's formulation internationalization capabilities and performance flexibility, and maintain a “buy” rating.

Risk warning

Risk of price fluctuations of heparin APIs, risk of collecting major varieties, risk of production quality accidents, competition risk, and risk of exchange rate fluctuations.