Huaxi Biotech released its 2023 annual report. Revenue for the year was 6.076 billion yuan, down 4.45% year on year; net profit to mother was 593 million yuan, down 38.97% year on year; net profit after deducting non-return to mother was 490 million yuan, down 42.44% year on year. Net operating cash flow was $700 million, up 10.15% year over year. It is proposed to distribute a cash dividend of 3.8 yuan (tax included) to all shareholders for every 10 shares. The total annual cash dividend accounts for 30.69% of net profit attributable to mother. In addition, the total amount paid by the company for share repurchases is 106 million yuan, which ultimately accounts for 48.56% of net profit to mother.
Huaxi Biotech released its 2024 quarterly report. The first quarter achieved operating income of 1.36 billion yuan, up 4.24% year on year; net profit to mother was 243 million yuan, up 21.39% year on year; net profit after deducting non-return to mother was 231 million yuan, up 53.30% year on year, and net operating cash flow of 35 million yuan.
Brief review and investment advice:
1. Internal reforms were promoted in '23, and the quarterly growth rate rebounded steadily. The company's 2023 revenue of 6.076 billion yuan decreased 4.45% year on year, net profit to mother of 593 million yuan fell 38.97% year on year, and gross margin fell 3.67 pct year on year to 73.32% year on year. The growth rate was pressured mainly by internal organizational management lagging behind the speed of business development, and the company promoted comprehensive management changes. Single 4Q revenue was 1.85 billion yuan, down 9.04% year on year; net profit to mother was 78 million yuan, down 73.37% year on year.
1Q24 revenue was 1.36 billion yuan, up 4.24% year on year; net profit to mother was 243 million yuan, up 21.39% year on year, net profit after deducting non-return to mother was 231 million yuan, up 17.01% year on year, and gross margin increased 1.95pct year on year to 75.73% year on year.
(A) Raw materials business: Revenue of 23 billion yuan, up 15.22% year on year, accounting for 18.59% of main business revenue, gross margin of 64.71%. The acceleration in revenue growth mainly benefited from the growth of high-margin pharmaceutical-grade raw materials and cosmetic grade raw materials. Among them, revenue from pharmaceutical-grade hyaluronic acid raw materials was 401 million yuan, up 18.96% year on year; revenue from export raw materials was 517 million yuan, up 21.47% year on year, accounting for 45.81% of raw materials business revenue.
(B) Medical terminal business: 23 billion yuan in revenue, up 58.95% year on year, accounting for 17.59% of the company's main business revenue, and gross margin of 82.10%; of these, dermatological medical products achieved revenue of 747 million yuan, an increase of 60.29% year on year; revenue from orthopedic injection products was 205 million yuan, an increase of 35.34% year on year, mainly due to collection and implementation.
(C) Functional skincare business: Revenue of 3.757 billion yuan in '23, a year-on-year decrease of 18.45%, accounting for 61.84% of the company's main business revenue, with a gross margin of 73.93%. Among them, Runbaiyan's single product series barrier repair series accounts for 40% of Runbaiyan's overall sales revenue; the self-operated channels of Skin Active and Miber have surpassed 50% of the overall sales revenue of various brands.
(D) Functional food business: Revenue of 58 million yuan in 23 years, down 22.53% year on year, mainly due to the company's adjustments to the functional food business and optimization of the company's financial structure.
2. The cost rate increased by 2.25 pct to 61.72% during 23 years, and the sales rate declined due to brand focus. The sales expense ratio decreased by 1.17 pct to 46.78% year on year, mainly due to the gradual optimization of brand resource allocation and marketing channel structure; the management fee ratio increased 1.92 pct to 8.10% year over year, mainly due to the increase in management and back-office department office staff; the R&D cost rate increased 1.24 pct to 7.35% year on year; the financial cost ratio increased 0.26 pct to -0.51% year on year; the final period cost rate decreased 2.25 pct to 61.72% year on year.
Operating profit decreased by 37.66% in 2013 to 702 million yuan, net income from fair value changes of 1.47 million yuan, net investment income of 1.33 million yuan, credit impairment losses - 5.06 million yuan, and other income of 13.79 million yuan. In addition, the effective tax rate increased by 1.58 pct to 16.96% year-on-year, and minority shareholders' profit and loss decreased by 280,000 yuan to 9.81 million yuan. Ultimately, net profit to mother fell 38.97% to 593 million yuan, and net profit after deducting non-return to mother decreased by 42.44% to 490 million yuan.
4. Business review: (1) Deepen links with core groups and continue to strengthen skincare brand mentality. ① Moisturizing Baiyan: Upgrading the brand positioning, proposing “hyaluronic acid technology repair and aesthetics”, using “repair” as the core effect to apply cutting-edge medicine and biotechnology to the field of functional skincare products to enhance the efficacy dimension and functional strength of the product; in April '24, a new “Genki Bomb” was launched, and hyaluronic acid+type III recombinant collagen collaborated to achieve rapid skin penetration and reduce wrinkles in 7 days. ② Quadi: Launched Quadi Zhenjin Yunhuo Anti-Aging Eye Cream, a large single product with structural anti-loosening around the eyes, to further focus on the differentiation of the core categories of the anti-aging circuit. ③ Mibel:
Continuing to cultivate the sensitive skin circuit, we plan to develop advanced products for sensitive skin and improve the sensitive skin graded repair product system for 24 years.
④ BM Skin Activity: Selected as “China's 500 Most Valuable Brand List” and “Brand Power Project”. Expanding demand for advanced benefits of oily skin over 24 years, such as skin tone improvement, oily skin care, sensitive oily skin, etc., focusing on consumer asset management and consumer satisfaction improvement.
(2) Family application of medical and aesthetic products, steady progress in brand internationalization. ① Product system: In '23, the company focused on optimizing the category system with large single products as the core to enable the differentiated management and orderly growth of each brand. Revenue from Microcrosslinked Runzhi Doll needles increased by more than 200% year on year, and revenue from Runzhi fillers increased by more than 250% year on year. ② Channel construction: In the domestic market, the company refined distribution channel cooperation, covering more than 3,500 new organizations in 23 years; in the international market, with the successful registration of the company's filler products in various countries, the brand internationalization process is progressing steadily. Currently, the products have been sold to 15 countries and regions including Europe and the Middle East. ③ R&D reserves: In 23 years, 99 pharmaceutical devices were developed, and 1 domestic Class III medical device registration certificate, 5 domestic Class II medical device registration certificates, and 11 international medical device registration certificates were obtained. The company's three types of medical device water light products have entered the registration stage and are expected to become the first batch of water light indication products to be marketed in compliance.
(3) Consolidate industry-university-research and accelerate the transformation and implementation of scientific research results. ① Basic research: R&D investment of 446 million yuan, a year-on-year increase of 14.98%; R&D personnel increased by 99 to 926, accounting for 19.89% of the total number of companies; 908 patents have been applied for; 452 authorized patents. ② Active substance development: In 23 years, a total of 9 new bioactive ingredient products were launched, including 3 pharmaceutical/medical device-grade raw materials, 4 personal care ingredients, and 2 food-grade raw materials. Trial production of micro-crosslinked hyaluronic acid powder products such as HyacrosSTL200 has been completed. In 23, it became the only company to undertake the key R&D project “Non-animal Chondroitin Sulfate Biological Creation Key Technology and Industrial Transformation”; the new 12000-square-meter R&D center site in Jinan and the “International Synthetic Biotechnology Innovation Industry Base” in Daxing, Beijing have all been put into use.
(4) Accelerate digital transformation and upgrading, and increase production capacity efficiency. ① Capacity upgrade: The company's sterile grade HA production line has completed trial production, consolidating the company's leading position in the HA high-end market. The construction of various production lines in the Huaxi Bio-Life Health Industrial Park, a fund-raising project, is progressing steadily. The first phase of the Huaxi Biotechnology Industrial Park built in the Haikou National High-tech Zone has obtained a production license and is officially put into use, helping to improve the company's international business layout in medical devices, regenerative medicine, and international business. ② Digital transformation: Industry 4.0 construction work and informatization work are mainly solidification and optimization. The company relies on data index boards to build data operation and support teams at various levels, and establishes mechanisms for data collection, logical alignment of business indicators, and data operation meetings. Effectively support the transformation of the company and the overall promotion of organizational processes.
Maintain judgment on the company. We believe that as a global leader in hyaluronic acid, the company is gradually moving from a “troika” to a “four-wheel drive” model and establishing a full industry chain system from raw materials to functional skincare products/food and medical terminal products.
The raw materials business continues to develop, expand a wide range of varieties/customers/scenarios, reorganize product pipelines, and build a full-level product matrix. Functional skincare products have grown from extensive growth to the refined operation stage, functional foods have opened up incremental space, and we continue to be optimistic about the continuous growth capacity brought about by the continuous expansion of various businesses.
Update profit forecasts and valuations. Revenue for 2024-2026 is expected to be 6.89 billion yuan, 7.85 billion yuan, and 8.80 billion yuan, respectively, up 13.4%, 13.9%, and 12.1% year-on-year, and net profit to mother of 810 million yuan, 1.01 billion yuan, and 1.17 billion yuan, with year-on-year increases of 36.7%, 24.6%, and 16.4%, respectively. The segmental valuation method is used to value the company. The main assumptions are as follows:
(1) Raw materials: With the world's leading microbial fermentation technology and enzymatic cleavage technology, the company ranks among the highest in the world in the scale of hyaluronic acid industrialization, and has maintained good growth in high-margin pharmaceutical-grade raw materials and solution-based cosmetic grade ingredients. Considering the company's comprehensive competitiveness such as leading technology, high-quality products, high-quality systems, large-scale production, and efficient service, it will maintain its leading edge in the industry. Refer to the industry to give the company's raw material products business 25-30 times PE in 2024, corresponding to a market capitalization range of 116-13.9 billion yuan.
(2) Functional skincare products: Through close cooperation and integration in the field of raw materials, medical device technology and skincare products, the company has developed a series of functional skincare products for different skin problems. Considering that the company began taking the initiative to make phased adjustments to its brands in '23, the industry gave the business 20-25 times PE in 2024, corresponding to a market value range of 2.9 to 3.7 billion yuan.
(3) Medical terminal products: Market demand has continued to expand in recent years, and dermatological medical products have grown rapidly, driving the medical terminal product business to maintain rapid growth. Considering that the company's Runzhi products are still scarce in compliant water light products, there are plenty of application scenarios for product family combinations, and it is expected to maintain high growth; pharmaceuticals benefit collection revenue contributions are improving. Refer to the predicted PE of 45-50 times the company's medical terminal business in 2024, corresponding to a market capitalization range of 166-18.4 billion yuan.
In the end, the company's overall market value range was 31-36 billion yuan, corresponding to a reasonable value range of 64.54-74.69 yuan, giving it an investment rating of “superior to the market”.
Risk warning: Changes in industry regulatory policies, increased industry competition, and progress in new product development and registration falls short of expectations.