Core View

The company released its 2023 performance forecast. During the reporting period, the sales revenue of the company's gene sequencer segment increased by about 30% year-on-year, and the core business maintained rapid growth. The profit side is affected by factors such as research and development, increased sales investment and impairment. Looking ahead to the 2024, the company's global footprint continues to expand, the European market has made more progress since 2023, and is expected to maintain rapid growth in the future. The U.S. manufacturing base is expected to be completed in 24Q1, which will further improve the U.S. supply chain and shorten the product delivery cycle, while the increase in instrument installation is expected to drive revenue growth in reagent supplies.

event

the company released 2023 performance forecast and accrued asset impairment reserve announcement on January 30, the company released 2023 performance forecast, expected to realize 2023 net profit -0.687 billion yuan to -0.578 billion yuan; The net profit attributable to the parent for the same period in 2022 is 2.026 billion yuan. Non-net profit -0.768 billion yuan to -0.646 billion yuan; The same period in 2022 is 0.264 billion yuan.

calculate 2023 Q4 single-quarter net profit -0.489 billion yuan to -0.38 billion yuan according to the performance forecast; 23Q4 single-quarter non-net profit -0.525 billion yuan to -0.403 billion yuan.

in addition, on January 30, the company issued a notice on the provision for asset impairment in 2023, confirming asset impairment losses and credit impairment losses of 0.274 billion yuan in 2023.

brief comment

sequencing business maintains rapid growth, and the profit side is affected by R & D and sales investment and accrual

core sequencing business maintains rapid growth. According to the company's performance forecast, the sales revenue of gene sequencer products in 2023 still maintained a relatively high growth. During the reporting period, the sales revenue of gene sequencer segment increased by about 30% year-on-year. In 2022, the company's gene sequencer business revenue will be 1.758 billion yuan, and the sequencing business revenue is expected to be 2.286 billion yuan in 2023 based on 30% growth. In the first three quarters of 2023, the gene sequencer business achieved revenue of 1.729 billion yuan, according to this calculation 2023Q4 sequencing business revenue of about 0.557 billion yuan. The company's core business is in good shape, with growth in 2023 in line with our previous expectations.

The profit side is affected by factors such as research and development, increased sales investment and impairment. The main reasons for the company's net profit and non-net profit loss in 2023 include: 1) the net compensation of US $0.325 billion paid by the Illumina in the same period last year; 2) In 2023, the revenue of laboratory automation products decreased year on year, and the contribution of gross profit decreased, but the revenue of sequencer sector still maintained a relatively high growth. 3) Continue to invest in new products and new technologies, and research and development investment increased year on year; 4) The number of global distribution marketing personnel has increased; 5) Based on the principle of prudence, impairment provisions are made for various types of assets.

R & D and sales to maintain high investment. According to the company's third-quarter report data, the company's sales expense rate in the first three quarters was 25.42, up from 10.25 pct year-on-year, mainly due to the company's active implementation of the internationalization strategy, promoting the localization development of the four major regions, team building and channel layout, resulting in an increase in the number of marketing personnel and an increase in sales expenses. Research and development cost rate of 29.14 percent, up 13.17 pct YoY, is expected to be mainly related to the company's growth in the number of research and development personnel, as of 23H1 company research and development personnel 1027 people, an increase of 34.6 percent over the same period last year. Overall, the company around the core technology continued to make efforts, sales investment to help global marketing channel coverage to improve, research and development personnel and investment expansion to build a patent moat, the formation of a strong patent barrier for latecomers, and for long-term development of technical reserves.

US manufacturing base is expected to be completed 24Q1. In November 2023, the company's U.S. subsidiary, Complete Genomics, announced plans to invest $3.2 million to build a manufacturing base in San Jose, California. At present, the construction of the manufacturing base has started and is expected to be completed and put into operation in March 2024.

The completion of the manufacturing base will further improve the U. S. supply chain, shorten the product delivery cycle, more efficiently empower local users in the United States. Marketing layout in the Americas: as of September 30, 2023, the company employs more than 2960 people worldwide, up 6% from the end of 2022; the total number of employees in the Americas market has exceeded 240, of which 45% are marketers, or about 110, up about 129 percent from the end of 2022. The layout of the Americas market personnel has laid the foundation for the company to further open up the Americas regional market and improve customer accessibility in the future.

the global layout continues to expand: as of September 30, 2023, huada zhizao has a business layout in more than 100 countries and regions on six continents. it has built 7 comprehensive bases including research and development, production and marketing functions, 9 customer experience centers, and has served more than 2,600 customers. Future global layout expansion is expected to empower more users.

Impairment has an impact on the profit side of the year 23: on January 30, the Company issued an announcement on the provision for impairment of assets for the year 2023, recognizing asset impairment losses and credit impairment losses of $0.274 billion in 2023. Of which asset impairment loss of $0.218 billion, mainly for provision for decline in value of inventories and provision for impairment of contractual assets; credit impairment loss of $0.057 billion, mainly for accounts receivable. According to the Company's previous annual report, the Company's laboratory automation and other products have performed well in the field of public health prevention and control, and we expect that the impairment may be related to epidemic prevention and control-related products, and the impact is expected to be limited in 2024 after digestion in 2023.

Future Outlook: Focus on the progress of the European and American markets. The company has been conducting patent litigation with Illumina in many countries and regions around the world since 2019, and has previously been restricted by court injunctions in some countries and regions. At present, most of the previous patent and trademark infringement litigation cases have been processed.

the European market has made much progress since 2023. in March 2023, the minutes of the European patent office (EPO) showed that the Illumina EP3002289 patent was found invalid. On June 19, the European Patent Office (EPO) Appeals Committee released the final ruling on the invalidity dispute between Illumina and Huada Zhizao patent, which showed that the Illumina EP3002289 patent was invalid. Sales in the European market are expected to continue to expand as the countries involved in the lawsuit settle. In addition, according to the company's previous announcement, in the initial entry of the region, the instrument revenue accounted for a relatively high. The company has been selling all products in the United States since January 2023, we expect that the current proportion of instrument sales is still high, the future with the instrument installation is expected to drive the growth of reagent supplies revenue, overseas market sales are expected to accelerate.

profit forecast

we forecast that from 2023 to 2025, the company's revenue will be 29.15 yuan, 37.43 yuan and 4.769 billion yuan respectively, up -31.1%, 28.4% and 27.4% year on year respectively. Net profit attributable to the parent company was -6.04, -1.65 and 0.166 billion yuan respectively. The equivalent EPS is -1.45 yuan/share, -0.4 yuan/share and 0.4 yuan/share, respectively. The company is still in the growth stage, research and development investment is large, overseas market expansion and team building also need corresponding sales investment to enhance the global market share, may affect the release of short-term profits. Using revenue indicators to examine the company's market share in domestic and overseas markets has been increasing in recent years, for fast-growing companies using PS valuation, the company 2023-2025 corresponding PS is 9.8X, 7.6X and 6X, the overall is in a reasonable range. Considering that the company is a leading domestic enterprise in the gene sequencer industry, the scarcity of the target is strong, and the company is actively exploring overseas markets, the future overseas promotion is expected to bring new performance increments, maintain the "buy" rating.

Risk Tips

Patent Litigation Risk: Gene sequencing-related instruments and consumables are in the upstream of the gene sequencing industry chain, with high barriers to entry as a whole, and related enterprises have more patent layouts. The company has previously conducted patent litigation with Illumina in many countries and regions around the world. If the litigation or settlement results are not as expected, it will affect the business development in relevant regions. It cannot be ruled out that the risk that the previous litigation may affect the future business of the products involved in the litigation abroad.

Overseas geopolitical risks. On January 29, 2024, the company issued a clarification announcement stating that the company was mentioned in a recent draft BIOSECURE Act proposed by the United States. According to the company's previous announcement, in the first three quarters of 23 years, the company's Asia-Pacific revenue was 0.29 billion yuan, Europe and Africa revenue was 0.26 billion yuan, and the Americas revenue was 0.1 billion yuan. The company's overseas revenue accounted for 37% of sequencing revenue. At present, the overseas revenue of sequencing business mainly comes from Asia-Pacific region and Europe and Africa region.

the current draft is still in the proposal stage, the company announced that the draft for the company's allegations there are many factual errors, the follow-up may be modified or terminated, whether the formation of the law is still large uncertainty. Subsequent adoption may have an impact on the Company's business in the United States.

market competition intensifies risk, new technology update replacement risk: gene sequencer industry in recent years, there are start-ups to enter, the future with the technology iteration and new technology breakthroughs, market competition may intensify.

Overseas business promotion is less than expected: After the company reconciles with Illumina in more countries and regions in the future, it still needs to enter the corresponding national market through promotion and face competition from overseas leading companies such as Illumina. Leading companies have previously established mature R & D The system, global coverage and other marketing networks have a good brand image and reputation. The company's overseas business promotion is less than expected will slow down the growth of the company's gene sequencer sector.

related transaction risk. The Company's 23H1 related party accounts for 26.20 percent of revenue, and a significant decline in related party purchases in the future could adversely affect the Company's results. In addition, the company and related parties previously had a certain amount of advance payments, but mainly for electricity, rent, etc., and accounted for less than 1% of the current revenue, the company's overall operation impact is small.

accounts receivable bad debt risk. The company's accounts receivable have increased compared with the beginning of the year. At present, the company's main customers include universities, scientific research institutes and well-known enterprises in the industry. The overall business reputation is good. However, if a large amount of accounts receivable cannot be recovered in the future, it will adversely affect the company's performance.

Inventory impairment risk. The company's inventory has increased compared with the beginning of the year, mainly because the company is in the overseas market development stage, in order to respond to overseas demand to increase production and stocking, if the future market demand falls sharply, product prices continue to fall or raw material prices continue to fall, inventory will face a larger impairment loss.