Core views:

Incident: The company released its 2023 annual report and the first quarter of 2024:2023 revenue of RMB 21.454 billion, +12.69%; net profit to mother of RMB 2,456 billion, +44.03% year over year; net profit after deducting non-return to mother of RMB 2,366 billion, +43.77% year over year. In Q1 2024, revenue was 6.219 billion yuan, +10.32% year over year; net profit to mother was 1,026 million yuan, +26% year over year; net profit after deducting non-return to mother was 992 million yuan, +25.67% year over year. The main driving reasons for the increase in performance include: (1) optimization of product structure in the infusion and non-infusion formulations sector; (2) year-on-year increase in sales and prices of major API intermediates; (3) Colombotech determined milestones related to MSD; (4) the decline in the size of interest-bearing debt and average financing interest rates, and a year-on-year decrease in financial expenses.

Infusion sector: The company continues to promote the closed infusion process to replace the semi-closed infusion process. The proportion of sealed infusion volume increased by 4.25 percentage points, improving overall profitability.

Non-infusion formulation sector: The company continues to adjust production capacity and increase market development. In 2023, Colon Generic Pharmaceuticals achieved 45 approved production projects, 4 clinical approvals, and 62 production applications; improvements, innovations, and NDDS complex formulation pipelines laid out more than 30 projects one after another.

API sector: Prices and markets for core products such as penicillin have recovered, and the company has strengthened cost management to reduce costs and increase efficiency. Some synthetic biology products have completed process verification and are expected to become the second growth curve of Chuan Ning Biotech.

Promote innovative research and development efficiently. In 2023, 6 clinical trials were approved by the CDE, and 3 NDAs were accepted (A166 third-line treatment for HER2+ BC, A140 for colorectal cancer and head and neck squamous cell carcinoma, SKB264 third-line treatment for TNBC). Overseas, MSD has initiated seven phase III clinical trials for SKB264.

Profit forecasting and investment advice. The company's 2024-2026 EPS is estimated to be 1.94 yuan/share, 2.12 yuan/share, and 2.40 yuan/share, respectively. The company's core business is growing steadily, and innovative achievements are gradually being implemented. Referring to comparable companies, the company was given a PE valuation of 25 times in 2024, with a corresponding reasonable value of 48.49 yuan/share, maintaining a “buy” rating.

Risk warning. There is a risk of failure in the development of new drugs, fluctuating API prices, and price reductions in collection exceeding expectations.