Event description: On October 27, 2023, the company released its report for the third quarter of 2023. 2023Q1-Q3 achieved operating income of 5.134 billion yuan, an increase of 14.22% over the previous year; realized net profit of 287 million yuan, a year-on-year decrease of 37.91%; and realized net profit deducted from non-return mother of 283 million yuan, a year-on-year decrease of 37.30%. Looking at a single quarter, 2023Q3 achieved operating income of 1,777 million yuan, a year-on-year increase of 9.44%; realized net profit of 220 million yuan, a year-on-year decrease of 87.62%; and realized net profit of net income after deduction of 14 million yuan, a year-on-year decrease of 90.89%.

Changes in industry demand+fluctuations in raw material prices put pressure on Q3 performance. Affected by changes in industry demand, increased competition, product price reductions, and fluctuations in raw material prices, the company achieved a gross profit margin of 26.58% in a single quarter, a year-on-year decrease of 11.1pct, a year-on-year increase of 10.57%, a year-on-year increase of 0.12pct; a management expense ratio of 7.44%, a year-on-year increase of 1.59pct; and a year-on-year R&D expense ratio of 7.68%, a year-on-year decrease of 1.08pct, and period expenses were under pressure. On the profit side, the company achieved a net profit margin of 1.14% in the single quarter of 23Q3, a year-on-year decrease of 8.9 pct, and net profit of 20 million yuan. Currently, the company is progressing in an orderly manner to reduce costs from product development, design, and supply chain. It is expected that the gross margin in 24 will return to the level of 22, and the performance is expected to bottom out and rebound.

Market share is still growing, and overseas growth is expected to accelerate in '24. Looking at the split revenue structure, sterile preparations increased 7% year on year from January to September last year, testing packaging fell 9% year on year, bioengineering increased 30%, solid preparation increased 5% year on year, revenue increased slightly year over year, number of products increased rapidly year on year, and market share continued to rise. Looking at the subregion, Romaco's order situation in the first three quarters was relatively good due to intense market competition. Both the amount of market inquiries and the number of orders increased rapidly, which is expected to be profitable this year; the overall performance of overseas orders at the headquarters is good, international customer visits have accelerated, and overseas growth is expected to accelerate in 24 years.

Under the “one vertical, one horizontal, one platform” industrial chain strategy layout, the widening of the product matrix opens up the revenue ceiling. Since June '23, the company's newly established company's business has progressed smoothly. Chutian Jingbang currently has orders of 115 million; Chutian Pete (peptide synthesis equipment), Chutian New Materials (pharmaceutical non-metallic components), and Chutian Boyuan (powder intelligent system equipment) have further enriched the company's industrial chain layout. Hundreds of customers have signed orders for chromatographic fillers for the new business. Orders for the full year of this year are expected to be 10 million, and the production base is expected to be completed by the end of March 2024. At the same time, the company continued to increase R&D investment. During the reporting period, the company developed a full range of customized hollow fiber ultrafiltration membranes and microfiltration membranes, independent development and implementation of integrated smart warehousing and logistics systems, and Romaco Group's launch of Tecpharm Cotech Laboratories in China. Diversification widens the company's revenue ceiling.

Profit forecast and valuation: Considering that the company's third-quarter results were pressured by factors such as changes in industry demand and changes in raw material prices, etc., we adjusted the profit forecast level. The company's 2023-2025 operating income is expected to be 68.0/77.1/8.75 billion, respectively, a year-on-year increase of 5.4%/13.4%/13.5%; net profit of 4.8/5.4/6.3 billion, a year-on-year growth rate of -15.9%/13.3%/16.0%, corresponding PE is 14.2/12.5/10.8 times. Maintain a “buy” rating.

Risk warning: risk of declining industry sentiment; new orders falling short of expectations; product sales falling short of expectations.