2022 and 1Q23 results are in line with our expectations

The company announced 2022 and 1Q23 results: In 2022, it achieved revenue of 8.266 billion yuan, +24.42% year on year; achieved net profit of 1,168 million yuan, +139.52% year on year. In line with our expectations, the rapid growth in performance was mainly due to (1) continuous expansion of domestic pharmaceutical business and rapid recovery after the US FDA ban was lifted; (2) increased sales volume further amortized fixed costs; (3) lean management helped reduce costs and increase efficiency; (4) increase in exchange earnings. 1Q23 achieved revenue of 2,059 million yuan, +16.15% year on year; realized net profit of 173 million yuan to the mother, +25.59% year on year, in line with our expectations.

Development trends

APIs: Traditional varieties are growing steadily, and new varieties are gradually being released. In 2022, the company's API business achieved revenue of 3,299 billion yuan (+18.67% YoY), with a gross profit margin of 47.17%, +4.89pct over the previous year. The steady increase in performance was mainly due to the year-on-year increase in major products such as sartan, pulley, and neurolein after the US ban was lifted. By the end of 2022, the company had 50 API products reviewed and approved by the National Drug Administration, registered 80 DMF numbers with the FDA, and 47 products obtained European CEP certification.

Domestic formulations: maintaining rapid growth. In 2022, the company's domestic pharmaceutical business achieved revenue of 3.748 billion yuan, with a gross profit margin of 83.58%, -2.23pct over the previous year. Mainly due to renewal and price reduction, domestic pharmaceuticals achieved a 3-year compound annual growth rate of 37.9%, maintaining rapid growth. The company continues to strengthen the product hierarchy, focusing on cultivating large varieties. By the end of 2022, the company had 24 pharmaceutical products selected in the collection and renewal of tenders. In 2022, the company obtained 9 domestic formulation registration approvals and completed 20 new product declarations, laying the foundation for medium- to long-term growth.

Foreign preparations: The US FDA saw a recovery after the end of the ban. In 2022, the company's overseas formulation business achieved revenue of 973 million yuan, with a gross profit margin of 42.32%, +3.92pct over the previous year, mainly due to fixed cost amortization due to scale effects. The company has formed a multi-channel marketing system in the US market, and its sales network covers large and medium-sized drug buyers in the US. By the end of 2022, major customers covered 95% of the US generic drug market. At the end of 2022, a total of 86 of the company's products received the US ANDA license (including 9 provisional approvals). According to US IQVIA statistics (December 2022 data), out of 54 products included in the statistics for the company's sales in the US market, 31 products ranked in the top three in market share, and the brand was recognized by the US mainstream market.

Profit forecasting and valuation

We kept the company's net profit of 1,478/1,981 million yuan unchanged in 2023/2024. Currently, the company is trading at a price-earnings ratio of 20/15 times 2023/2024. We maintained an outperforming industry rating and kept the target price unchanged at 29.88 yuan (based on the PE valuation of comparable companies in 2023), corresponding to a price-earnings ratio of 30/22 times and an upward margin of 52.6% in 2023/2024.

risks

Higher prices of upstream raw materials have led to higher costs and pressure on gross margins; excessive reduction in procurement prices has led to a decline in the company's gross margin of formulations; the share of overseas revenue is too high; and there is a risk of litigation.