Core profit is forecast to drop 25-30% year over year
The company issued a performance forecast: The company expects revenue to fall 2%-5% year on year in 2023, and net profit to mother excluding special projects will drop 25%-30% year on year. Due to the high base of epidemic prevention products such as the pharmaceutical packaging sector in 2022, general consumption and orthopedic collection pressure, and regulatory compliance policy adjustments in the pharmaceutical industry, etc., the company's revenue and core net profit fell short of our expectations.
The subsidiary Weigao Orthopedics (688161.SH, not covered) released a performance forecast: Weigao Orthopedic expects net profit of 90 million yuan to 120 million yuan in 2023 (a year-on-year decrease of 78.0%-83.5%).
Weigao Orthopedic said that the decline in profits is mainly due to a decrease in the price of collected products, a large year-on-year decline in revenue and gross margin, a large year-on-year increase in impairment losses on calculated inventory assets, and a high year-on-year increase in new product development expenses.
Key points of interest
Clinical care: The collection of low-value consumables continues to be normalized 1. We believe that the 2022 Jilin Union's collection of indwelling needles and the Sanming Alliance's collection of eight types of low-value consumables will all be implemented in 2023. Since 2023, low-consumption harvesting has shown an expansion trend: 1) In July 2023, the Guangdong Union released the results of Class 9 low-consumption harvesting, with an average drop of 45.7%; 2) Hunan Province and Jiangxi Province have successively launched municipal alliance low-consumption harvesting. We believe that low-value consumables for clinical care may continue to face price pressure, but benefiting from the sinking hospital market and supply-side concentration, price in exchange for volume may drive a slight increase in revenue. We expect innovative products such as digitalization to drive the price and gross profit of the clinical care sector.
Orthopedic 2024 is on the market at a young age, and there may be downward pressure on medicine packaging. 1) Orthopedics: We expect to complete all inventory returns and exchanges in 2023, and spinal inventory to return to normal levels; 1H24 spine products are still affected by a high price base, and 2H24 orthopedic revenue and profits are expected to rebound. The company actively lays out innovative products that are not collected. Vertebral stents/refurbished ceramic ball heads/single condyles were proven at the end of 2023; in 2023, it expanded the field of minimally invasive orthopedics through acquisitions, and completed the registration and mass production and marketing of spinal endoscopy and arthroscopy systems. 2) Pharmaceutical packaging: Due to weak financing, biotech customers' pipeline progress is slow, demand-side orders for prefilled syringes are weakening, and supply-side production capacity expansion is likely to decline in recent years.
Profit forecasting and valuation
Due to pressure on clinical nursing, orthopedics and drug packaging businesses, the 2023/2024 core EPS forecast was lowered by 23%/32% to 0.46 yuan and 0.49 yuan, and an adjusted EPS forecast of 0.54 yuan was introduced for the first time in 2025. The current stock price corresponds to 9.0/8.0 times the 2024/2025 adjusted price-earnings ratio. Maintaining an outperforming industry rating, due to a downward shift in the pharmaceutical sector's valuation center, we lowered our target price by 41% to HK$7.5, corresponding 13.4/11.9 times the adjusted P/E for 2024/2025, with 49.7% upside compared to the current stock price.
risks
The reduction in procurement prices exceeded expectations, and the launch progress of new products fell short of expectations.