Revenue growth slowed significantly in 2023

The company's revenue in 2023 increased 4.8% year on year to 2.38 billion yuan (RMB, same below), gross profit fell 9.4% year on year to 980 million yuan, and shareholders' net profit decreased 63.0% year on year to 40 billion yuan. After excluding the fair value loss of about 290 million biological assets due to the decline in the market price of experimental monkeys, core business profit fell 7.3% year-on-year to about 690 million yuan. The revenue and profit situation for 2023 were in line with the profit forecast issued by the company in January. Due to the poor operating environment of downstream pharmaceutical companies, they cut R&D expenses and terminated orders of about 800 million yuan, which led to a significant slowdown in revenue growth and a decline in core business profits.

It is expected that 2024 will still face challenges. Lowering the 2024-25 revenue and profit forecast We warned in our January report that the company will face challenges in 2024. Looking at the current situation, we lowered our 2024-25E revenue forecast by 10.4% and 16.7%, respectively, based on: 1) The company reduced the number of new orders signed in 2023 from 3.8 billion yuan in the same period last year to 2.3 billion yuan, which is less than expected. Since company orders usually take 1-2 years to be fulfilled, the reduction in new orders signed in '23 will have an impact on revenue in 2024-25. 2) According to the information obtained by Arterial Network and the company's management, the domestic pharmaceutical companies' financing environment picked up moderately from January to January 2024, but it will take time for the company to recover significantly, so we expect that the amount of new orders signed by the company will not rise significantly in the short term. 3) Judging from the contract debt situation, which is one of the leading indicators of CXO enterprise revenue performance, contract debt fell 11.0% year-on-year to 1.15 billion yuan at the end of 2023.

Maintaining a “neutral” rating, target price of HK$8.48

Judging from the new orders signed in 2023, we think it will be difficult for the company's gross margin to rise back to 2022 levels in the short term.

Since the company breeds experimental monkeys, shareholders' net profit is affected by fair value profit and loss of biological assets due to fluctuations in the market price of experimental monkeys. In 2023, due to a drop in the market price of experimental monkeys, the company recorded a fair value loss of about 290 million yuan in biological assets. Management said that the market price of experimental monkeys stabilized in 2024, but since terminal demand is difficult to recover significantly in the short term, we do not expect a sharp recovery in experimental monkey prices in 2024. Based on the above situation, we reduced 2024-25E shareholders' net profit by 10.5% and 16.8%, respectively. We adjusted the target price to HK$8.48, corresponding to 11.0 times 2024E PER (previous value was 12.0 times 2024E PER) to reflect the reduction in profit forecasts and maintain a “neutral” rating.

Risk warning: (1) If customers cut R&D expenses, revenue may be affected; (2) if the price increase of animal testing models exceeds expectations, it may affect performance; (3) Overseas business expansion and clinical business expansion may be slower than expected.