Key points of investment

The company's fixed asset turnover rate in 2022 and 2023Q1 revenue reached record highs. We continue to be optimistic that in 2023-2025, against the backdrop of the company's release of Zhejiang Ruibo's technological transformation production capacity, the launch of the Rebo Suzhou peptide project, and the promotion of new production capacity construction in Taizhou, CDMO's high growth rate will continue to materialize, and the overall net interest rate will continue to rise.

Financial performance: High growth continues to be realized

The company released its 2022 annual report and the first quarter report of 2023. The revenue for 2022 was 5.45 billion yuan, an increase of 34% over the previous year; the net profit of the mother was 920 million yuan, an increase of 45.3% over the previous year; and the net sales interest rate was 16.9%, an increase of 1.3 pct over the previous year. Revenue for the first quarter of 2023 was 1.75 billion yuan, an increase of 27.5% over the previous year; the net profit of the mother was 280 million yuan, 35.1% year on year; net sales interest rate was 16%, an increase of 0.86pct over the previous year. We believe that the rapid growth rate of the company's net profit in 2022 and the first quarter of 2023 is in line with our expectations.

Growth capacity: Strategic customer growth base market. Looking at the flexible revenue structure from new customers and new projects, CDMO revenue in 2022 was 3.42 billion yuan, up 47.8% year on year, accounting for 62.7% of revenue; API revenue was 1.9 billion yuan, up 22.6% year on year, accounting for 34.9% of revenue; trade and other revenue was 130 million yuan, down 36.6% year on year, accounting for 2.3% of revenue. Look at growth by business sector:

① CDMO: Strategic customer projects continue to be launched, and there are bright spots in new customers and new projects. Based on the company's annual report “by product situation” revenue split and “by treatment field” revenue split, we estimate that in 2022, the company's CDMO revenue center grew rapidly in vascular, antineoplastic, and other categories. We believe that the rapid growth in the company's CDMO business came from (1) continued growth in sales of key projects for strategic customers: According to Novartis's 2022 report, Novartis's 2022 US sales were 2.35 billion US dollars, up 38% year on year, and sales outside of the US were 2.29 billion US dollars, up 25% year on year, global sales of 4.64 billion yuan The US dollar increased 31% year over year (in dollar terms); Kisqali's global sales in 2022 were $1.23 billion, up 31% year over year.

In the first quarter of 2023, Novartis's core products maintained a steady growth rate: Novartis's global revenue was 1.4 billion US dollars, an increase of 32% over the previous year. Judging from the growth composition, 2023Q1 European growth came from HFrEF indications, and China and Japan increasingly contributed by increasing indications for hypertension; Kisqali's global revenue was 415 million US dollars, up 81% year on year. At the end of February 2023, Kisqali accounted for about 28% of metastatic breast cancer NBRX (new to brandX) in the US After the NCCN guidelines listed Kisqali as first-line treatment for metastatic breast cancer aromatase inhibitors, we expect Kisqali to continue to grow rapidly. (2) Increased number of new projects: According to the company's annual report, there are 26 listed projects in the company's CDMO projects in 2022 (6 year-on-year increase), 61 clinical phase III projects (12 year-on-year increase), and 764 clinical phase 2 and earlier projects (182 year-on-year increase). We believe that from the perspective of project hierarchy, customer reserves, etc., the company's CDMO business is still on a high growth trajectory. Clinical stage advancement, and an increase in the number of projects are expected to continue to contribute to the growth momentum of CDMO projects. Looking ahead to 2023, we anticipate: (1) continued release of strategic customer projects (noxintol hypertension indications, Kisqali's NATALEE trial phase III clinical phase reached the main end point, etc.), (2) domestic and international clinical phase new project NDA or post-marketing volume, and (3) new business growth (according to the company's official account, the first batch of peptide products at the new pilot plant in Ruibo Suzhou in 2023 is expected to continue to increase, and the share of new businesses such as peptides is expected to continue to increase), and the company's CD business is expected to maintain high growth in 2023-2025.

② Active Pharmaceutical Ingredients: New varieties are expected to bring about an increase. According to the company's annual report, central nervous system and non-steroidal APIs grew rapidly in 2022, and hypoglycemic APIs declined. Looking ahead to 2023, we expect an increase in demand for commercialization of hypoglycemic varieties, and the listing of central nervous system varieties after registration and filing, which is expected to lead to an increase in the API business.

Profitability: Under the influence of falling costs and revenue structure, net interest rate is expected to increase gross profit margin: it is expected to continue to increase. In 2022, the company's gross profit margin was 34.7%, an increase of 1.3 pct over the previous year. By business, the gross profit margin of the CDMO business was 39.7%, an increase of 1.1 pct over the previous year; the gross margin of the API business was about 26.7%, down 1.2 pct from the previous year. We believe that the increase in gross margin of the CDMO business may be related to changes in the project and revenue structure. The decline in the gross margin of the API business may be affected by factors such as rising costs. Looking ahead to 2023, we expect the gross margin of the API business to gradually increase as upstream costs fall; the increased scale effect of commercial products and the increase in the share of high-barrier projects in CDMO projects will drive an increase in gross margin of CDMO revenue; compounded by the impact of the increase in CDMO's revenue share, we expect the company's comprehensive gross margin to continue to increase in 2023-2025.

Net interest rate: Net interest rate is expected to increase. In 2022, the company's net interest rate to the parent increased 1.31 pct year on year. Judging from the change in the expense ratio, the 2022 sales expense ratio fell 0.15 pct year on year, the management expense ratio decreased 0.42 pct year on year, and the financial expense ratio increased by 1.01 pct year on year, and the financial expense ratio decreased 2.5 pct year on year. We believe that the decline in the financial expense ratio is related to fluctuations in the RMB exchange rate. Looking ahead to 2023-2025, we expect the management expense ratio, sales expense ratio, and R&D expense ratio to be basically stable. However, considering hedging, etc. Influenced by factors, the impact of RMB appreciation on net interest rates may be relatively limited; driven by an increase in gross margin, we expect net interest rates to increase.

Operating capacity: Optimistic about the release of production capacity, growth elasticity under high operating efficiency, fixed asset turnover has reached a new high, and high-end production capacity upgrades continue. According to the company's annual report, the company's fixed asset turnover ratio reached 2.44 in 2022, and has continued to increase since 2019. We believe that the increase in turnover comes from the application of the company's new technology platforms (chiral catalysis, continuous technology applications, fluorochemistry, enzyme catalysis, photocatalysis, etc.) and diversified project structures. As Zhejiang Ruibo completes intelligent and automated transformation, Ruibo Taizhou (phase I) is put into operation in 2024, the Ruibo Suzhou polypeptide GMP workshop is put into use, and we expect a higher turnover rate of fixed assets. Company CDMO The project is expected to achieve relatively rapid growth.

Cash flow: Operating cash flow improved year over year, and capital expenditure continued to increase. Net cash flow from the company's operating activities increased 80.9% year-on-year in 2022. Judging from supplementary data, it was mainly due to year-on-year improvements in operating receivables. In terms of capital expenditure, the company paid $7.1 billion in cash for the purchase and construction of fixed assets, intangible assets, and other long-term assets in 2022, an increase of 23.1% over the previous year.

Profit forecasting and valuation

We expect the company's EPS for 2023-2025 to be 1.46, 1.92, and 2.43 yuan/share, respectively. The closing price on May 5, 2023 corresponds to 21.3 times PE in 2023. We believe that the company is in the stage of continuous growth of strategic customer (such as Novartis, Roche, Shuo Teng, etc.) projects and optimization of new customers/project structures at home and abroad. Big customers and big project management experience are the foundation for the company's next stage; we are optimistic about marginal changes in the company's supply capacity (skewed production capacity investment in innovative drug R&D centers, increased production capacity investment in new processes & cutting-edge technology, etc.) in CDMO planning projects, new Novartis projects increased, cooperation between other multinational pharmaceutical companies increased, domestic innovative drugs entered the commercial release period, etc.), as well as in new company fields (peptides, nucleic acids, etc.) (Formulation The expansion of CDMO, etc.) will drive the company's continuous development. Maintains the “buy” rating by comprehensively considering the company's poor expectations of CDMO business growth elasticity and sustainability during the revenue structure transition window period.

Risk warning

Risk of production safety accidents; risk of discontinuation of production due to environmental incidents; risk of CDMO business order volatility; risk of new drug marketing review falling short of expectations; risk of major customer churn, etc.