Core views

The company achieved steady growth on the 2024H1 revenue side, after deducting double-digit growth on the non-profit side. The performance was in line with expectations. Growth has continued at home and abroad, and profitability has remained stable. The company has established a global standardized management system, and the quality management system continues to be recognized. The company returned to a healthy growth trajectory in the first half of the year. Considering the base for the same period last year and the current progress in deploying new platforms, growth is expected to accelerate in the second half of the year. Currently, the company's global market share is still low. The global localization strategy helps to achieve a rapid response to local scientific research needs in North America, Europe, Southeast Asia, etc., and is optimistic about the long-term development of the company under the trend of rising overseas outsourcing rates.

occurrences

The company released the 2024 semi-annual report

The company achieved operating income of 0.997 billion yuan in 2024H1, an increase of 7.18% over the previous year; achieved net profit of 0.078 billion yuan, an increase of 3.86% over the previous year; realized net profit without deduction of 0.066 billion yuan, an increase of 12.92% over the previous year.

24Q2 achieved revenue of 0.528 billion yuan in a single quarter, up 7.94% year on year; realized net profit of 0.051 billion yuan, down 3.66% year on year; realized net profit deducted from mother 0.045 billion yuan, up 16.06% year on year.

Brief review

Return to a healthy growth trajectory, and the global layout continues to be implemented

It has returned to a healthy growth trajectory since 24 years, and has maintained growth both domestically and overseas. The company achieved steady growth on the 2024H1 revenue side, and the growth rate on the non-profit side was even faster. The net profit growth rates of non-return to mother in the 23Q4 to 24Q2 quarters were -20.45%, -27.22%, 6.85%, and 16.06% respectively. Since 24Q1, it has returned to a healthy growth path, and its performance is in line with expectations. Looking at the main business regions, 24H1's domestic revenue was 0.496 billion yuan, up 6.27% year on year, accounting for 49.7%; revenue from Hong Kong, Macao, Taiwan and overseas regions was 0.501 billion yuan, up 8.09% year on year, accounting for 50.3% of revenue. Overseas accounts for the whole year increased by 1 pct compared to 23. Domestic revenue resumed growth (domestic revenue fell 9.43% year-on-year for the full year), and the overall performance of overseas business was good. Benefiting from the good development of the company's global localization strategy, the share of revenue continued to increase.

Profitability remains stable. 24H1's gross profit margin was 41.71%, +0.14 pct year over year, and has stabilized in the 40%-45% range in recent years. The gross profit margin for the 24Q2 quarter was 42.75%, up 2.21 pcts from the previous quarter. The 24H1 sales expense ratio was 19.62%, +0.43 pct year-on-year, mainly due to the increase in sales expenses due to the company's continuous localization layout and increased market investment. The management expense ratio was 8.32%, -1.37 pct year on year, mainly due to reduced managers' remuneration and the reporting of depreciation expenses corresponding to housing rental; the R&D expense ratio was 4.57%, compared to -0.77pct, which remained stable, and the company's R&D activities were carried out normally according to the project plan. The financial expense ratio was -0.79%, +0.12 pct year over year, mainly due to a decrease in earnings changes. 24H1's net profit margin was 8.25%, -0.2 pct year on year, and profitability remained stable.

Operating cash flow and balance ratio are continuously optimized. The net cash flow from 24H1's operating activities was $0.082 billion, and the same period in '23 was $0.005 billion. The changes were mainly due to short-term fluctuations in revenue payback during the reporting period, as well as a decrease in the company's value-added tax withholding tax rebates and an increase in withheld income tax. The net cash flow from investment activities was $0.138 billion, compared to $0.444 billion for the same period in '23, mainly due to an increase in the company's redemption of financial assets and a decrease in investment financial assets. Net cash flow from fund-raising activities was $0.154 billion, compared to $0.008 billion for the same period in '23, mainly due to the company's repurchase of A-shares. The company's 24Q2 balance ratio was 29.13%, down 2.05 pcts from the end of 23 and 4.91 pcts compared to 23H1. Balance and liability structure optimization Continuous optimization.

The quality management system continues to be recognized, and a global standardized management system has been established. As a leader in the genetic sequencing service industry, the company has built a full-chain quality management system and established a standard SOP in strict accordance with international standards. In the first half of the year, the company passed a number of quality evaluations. In May '24, the company's Tianjin Medical Laboratory and Guangzhou Medical Testing Laboratory passed the NCCL EGFR gene mutation testing laboratory interlaboratory quality assessment with a perfect score; in August '24, the company's Shanghai laboratory successfully passed the technical inspection of clinical gene amplification testing laboratories. In addition to being certified by authorities such as the National Health Commission's Clinical Testing Center (NCCL), the company became the 10x Genomics Single Cell and Spatial Omics Preferred Service Provider in June '24, and in August '24, the company's joint venture in Singapore, NovoGeneait was approved to provide third-generation sequencing services for 10,000 samples from the Precise Health Research (PRECISE) in Singapore. In recent years, the company has established a globally standardized laboratory management system and operation process to ensure uniform global service levels and product delivery quality, and service standards have been recognized.

The global localization and regional centralization layout continues to be strengthened. In December 2023, the company officially opened the Biotech Innovation and Entrepreneurship Center in Munich, Germany

IZB opens a new German laboratory to further enhance its service capabilities in the European region. In January 2024, the company officially announced the opening of a new laboratory in Japan and the deployment of the Illumina next-generation sequencing platform to the Japanese laboratory to serve local customers in Japan. In March 2024, the company's Shanghai laboratory was officially opened. This laboratory is the company's first self-built laboratory in East China. Currently, the company's global market share is still low. In the future, along with the increase in overseas outsourcing rates, the company's global localization strategy will help achieve a rapid response to local scientific research needs in North America, Europe, Southeast Asia, etc., and gradually increase global market penetration.

Future outlook: Return to a healthy growth trajectory throughout 2024, and the global layout continues to be implemented. The company's 23H2 performance fluctuates slightly in the short term due to run-in and commissioning of the new platform. We believe that the deployment of the new platform has now basically been completed, and 24H1 has returned to a healthy growth trajectory. Considering the base for the same period last year and the current progress of the new platform deployment, growth is expected to accelerate in the second half of the year. The company is a leading company in the genetic sequencing service industry. The forward-looking layout of full-process production automation and new platform switching will continue to improve the service quality and delivery experience provided to customers. Judging from the global layout, overseas German and Japanese laboratories and domestic Shanghai laboratories have been launched one after another, helping to better serve regional customers, achieve rapid response to local scientific research needs, and gradually increase global market penetration. It is expected to benefit from the trend of increasing overseas outsourcing rates.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 22.3 billion yuan, 2.52 billion yuan, and 2.87 billion yuan, respectively, up 11.4%, 13% and 13.9% year-on-year; net profit to mother will be 1.91, 2.19, and 249 million yuan, respectively, up 7.3%, 14.7%, and 13.4% year-on-year, respectively. Equivalent EPS is 0.46 yuan/share, 0.53 yuan/share, and 0.6 yuan/share, respectively, and the corresponding PE is 23.3X, 20.3X, and 17.9X. The company is a leading company in the field of genetic sequencing services. In the future, as intelligent upgrades and global localization and regional centralization advance, the company is expected to continue to consolidate its leading position in the industry and maintain a “buy” rating.

Risk warning

Overseas business growth falls short of expectations: The company has set up subsidiaries to operate in Hong Kong, the United States, the United Kingdom, Singapore, the Netherlands, Japan, etc. Overseas revenue continues to increase as a share of the company's overall revenue, and undergrowth in overseas business will drag down the company's performance. Furthermore, if there are adverse changes in the relevant laws, regulations, politics, economic environment, etc. of the country where overseas operations are located, they may have an impact on the normal development and continued growth of the company's overseas business.

Risk of dependency on upstream suppliers: The genetic sequencing services provided by the company are in the middle of the genetic sequencing industry chain. The upstream is an R&D and manufacturer of instruments and consumables related to genetic sequencing, and the overall entry barriers are high. Currently, the upstream equipment and consumables suppliers introduced by the company are mainly Illumina, Thermo Fisher, Pacbio, Huada Intelligent Manufacturing, etc., and there is a risk of dependency on upstream suppliers. However, in recent years, upstream domestic enterprises have developed rapidly and broken overseas monopolies, and dependence on a single supplier may decrease in the future.

Market competition increases risk: The genomics application industry is developing and iterating rapidly. Technological upgrades such as upstream high-throughput sequencing have led to a continuous decline in sequencing costs, and market competition may intensify.