Core views

The company's 2024Q1-3 performance was in line with expectations, and it has returned to a healthy growth trajectory since '24. The small flexible intelligent delivery system Falcon III was launched. Intelligent automation continues to be upgraded, and the new system has been deployed to the company's German laboratory. The company is a leading company in the genetic sequencing service industry. It has a forward-looking layout of full-process production automation and new platform switching. We believe that the deployment of the new platform has basically been completed, and the overall performance is expected to return to a healthy growth trajectory for the whole of '24. The company's global market share is still low, and it is expected to benefit from the upward trend in overseas outsourcing rates. The recovery in customer research activities in the context of interest rate cuts is expected to accelerate business growth.

occurrences

The company released its report for the third quarter of 2024

On October 24, the company released the 2024 third quarter report. In Q1-3, revenue was 1.519 billion, +6.30%; net profit to mother was 0.134 billion, +7.33% YoY; net profit after deducting non-return to mother was 0.112 billion, +7.26% YoY.

24Q3 achieved revenue of 0.523 billion yuan, +4.68% year over year; net profit to mother 0.057 billion, +12.52% year over year; net profit after deducting non-return to mother 0.046 billion, +0.03% year over year.

Brief review

Performance is in line with expectations, and intelligent automation continues to be upgraded

The company achieved revenue of 1.519 billion in Q1-3 in '24, +6.30% YoY; net profit to mother 0.134 billion, +7.33% YoY; net profit after deducting non-return to mother 0.112 billion, +7.26% YoY. 24Q3 achieved revenue of 0.523 billion yuan, +4.68% year over year; net profit to mother 0.057 billion, +12.52% year over year; net profit after deducting non-return to mother 0.046 billion, +0.03% year over year. The performance was in line with expectations, and it has returned to a healthy growth trajectory since '24. Judging from the regional performance of 24H1's main business, 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, and overseas share continued to increase. We expect Q3 to continue this trend, and overseas business will benefit from the company's global localization strategy to achieve good development.

Falcon III was launched, and intelligent automation continues to be upgraded. Relying on its rich experience in intelligent automation and excellent R&D capabilities, the company launched Falcon III, a small flexible intelligent delivery system with multiple products in parallel after Falcon and Falcon II, by improving various technologies. In terms of parameters, Falcon III integrates 8 precision instruments, and is suitable for WGS and RNA-seq products, from library construction to library pooling automation operations, increasing production capacity by more than 25% compared to Falcon II; at the same time, it has further reduced the size, covers an area of only 5 m2, and is more flexible in operation and maintenance. The company continues to cultivate in the field of intelligent automation. The Falcon series platform was first launched in 2020, and the small flexible intelligent delivery system Falcon II was developed and launched in 2022. The Falcon III launched this time is expected to help drive the intelligent automation process in the gene technology industry.

Global localization and regional centralization are progressing steadily. In September 2024, the company's Falcon III system was deployed to Novo Zhiyuan's German laboratory, which is expected to promote the upgrading of efficiency and service quality in Europe and strengthen the brand's global market layout advantages. The company continued to deepen its global localization and regional centralization strategy in 2024. In January 2024, it 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 Japanese customers. 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.

Profitability has been rising steadily, and operating cash flow has been clearly optimized. The gross profit margin of the 24Q1-3 company was 42.59%, -0.37 pct year on year. It has stabilized in the 40%-45% range in recent years. The gross profit margin for the 24Q3 quarter was 44.28%, -1.27 pct year over year. The 24Q1-3 sales expense ratio is 19.62%, +0.94 pct. It is expected to be mainly due to the increase in sales expenses due to the company's continued localization layout and increased market investment. The management expense ratio was 7.87%, -1.59 pct year on year, the R&D expense ratio was 5.07%, the company's cost side was well controlled overall; the 24Q1-3 financial expense ratio was -0.46%, +0.19 pct year on year, Q3 financial expense ratio 0.18%, and the year-on-year +0.35 pct year on year. We expect it to be related to factors such as exchange gains and losses. The net interest rate of 24Q1-3 company was 9.2%, +0.05 pct year on year, 11.03% in the Q3 quarter, and +0.59 pct year on year. Profitability increased steadily. 24Q1-3's net cash flow from operating activities was 0.039 billion yuan, +5.4% year on year. The net cash flow from operating activities in the Q3 quarter was 0.121 billion yuan, +188.1% year on year. Cash flow from operating activities improved significantly. The rest of the financial indicators are generally normal.

Future outlook: The full year of 2024 will return to a healthy growth trajectory, and overseas business is expected to benefit in the context of interest rate cuts. The company's 23H2 performance fluctuated 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 basically been completed, and the overall performance is expected to return to a healthy growth trajectory for the full year of '24. 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. Looking at the global layout, overseas German and Japanese laboratories and the domestic Shanghai laboratory have been deployed one after another. The latest Falcon III system has been deployed to the company's German laboratory, which helps to better serve regional customers, achieve rapid response to local research needs, and gradually increase global market penetration. It is expected to benefit from the upward trend in overseas outsourcing rates. The recovery in customer research activities in the context of interest rate cuts is expected to accelerate business growth.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 2.16 billion yuan, 2.43 billion yuan, and 2.8 billion yuan, respectively, up 7.9%, 12.5% and 15.2% year over year; net profit to mother will be 1.92, 2.16, and 248 million yuan, respectively, up 7.6%, 12.7% and 15.1% year on year, respectively. Equivalent EPS is 0.46 yuan/share, 0.52 yuan/share, and 0.6 yuan/share, respectively, and the corresponding PE is 27X, 23.9X, and 20.8X. 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.