occurrences

On October 28, 2023, the company released its third quarter report. In the first three quarters, the company achieved revenue of 10.292 billion yuan (-34.15%), net profit of 531 million yuan (-78.13%), net profit of 531 million yuan (-78.13%), and deducted non-net profit of 482 million yuan (-80.01%).

Comment:

The base period affects short-term performance, and regular business maintains a good growth rate

2023Q3 achieved revenue of 3.450 billion yuan (-29.25%), net profit of 78 million yuan (-85.84%), net profit of 78 million yuan (-85.84%), and net profit of 150 million yuan (-71.88%) after deducting non-net profit of 150 million yuan (-71.88%). The year-on-year decline in apparent performance and profit was mainly affected by the decrease in demand for COVID-19 nucleic acid testing and the decline in COVID-19 testing volume.

Excluding disturbances, the company's other regular business maintained a high growth rate during the reporting period. In the first three quarters of 2023, the company's diagnostic services achieved revenue of 4,080 billion yuan (+17.07%), ICL service revenue of 3.711 billion yuan (+21.16%), channel product business revenue of 6.221 billion yuan (+6.07%), and revenue from self-developed products of 329 million yuan (+30.56%). Among them, the single Q3 company achieved revenue of 1,353 billion yuan (+5.62%), ICL service revenue of 1,232 billion yuan (+10.01%), channel product business revenue of 2.107 billion yuan (+4.14%), and revenue from self-developed products of 100 million yuan (+9.89%).

Profitability has declined, and operating cash flow continues to improve

In the first three quarters of 2023, the company's comprehensive gross margin was 32.81% (-8.31pct), and the overall net profit margin was 7.69% (-10.66pct); the consolidated gross margin and overall net profit margin for a single Q3 were 32.15%/5.22% (-4.36pct/-8.81pct, respectively), which is expected to be mainly due to a decrease in the scale effect and an increase in the share of fixed costs due to falling demand for COVID-19 testing; among them, the additional credit impairment loss of 101 million yuan in the third quarter had a negative impact on Q3 net profit margin. In addition, the company vigorously promoted the clean-up of accounts receivable. As of the end of the third quarter, the balance of accounts receivable was 9.390 billion yuan, a decrease of 275 million yuan from the end of the second quarter. The repayment process went smoothly, and the accounts receivable clean-up work achieved remarkable results. As the company's collection work progresses in an orderly manner and the industry environment gradually improves, we expect the company to have a low risk of bad debts in the future, and performance is expected to gradually improve starting in Q4.

Investment advice: Maintaining a “buy” rating

The company is under apparent pressure due to the disruptive factors of the COVID-19 pandemic last year. Regular business, channels, and self-developed product sectors have all improved to varying degrees. We are optimistic about the company's business capabilities in the field of third-party testing. The “product+service” medical testing platform has obvious collaborative advantages. Considering the impact of the company's COVID-19 impairment, we have slightly revised our profit forecast. It is expected that the company will achieve total revenue of 141.16/161.72/18.438 billion yuan from 2023 to 2025 (previous value: 142.29/161.54/18.073 billion yuan), year-on-year 30.4%/+14.6%/+14.0% (previous value -29.8%/+13.5%/+11.9%); will achieve net profit of 9.04/12.00/1,487 billion yuan (previous value of 10.58/13.77/16.80 billion), or -37.0%/+32.7%/+24.0% (previous value -26.2%/+30.2%/22.0%), maintaining the “buy” rating.

Risk warning

Policy risks; accounts receivable management falls short of expectations; diagnostic quality control falls short of expectations; industry competition increases risk.