Core view

The company's 24Q1-3 main business income has declined due to the impact of short-term fluctuations in downstream demand, overseas macro environment and geopolitics, etc., because the company is still in the growth stage of large R&D investment, and at the same time, overseas market expansion and team building need corresponding sales investment, and the profit side of the single quarter has a loss. The downstream demand of the gene sequencer business fluctuated in the short term, and cooperation in multiple fields continued to advance. In terms of new product progress, the nanopore gene sequencer has been officially released. Future prospects: 1) The overseas interest rate reduction cycle has begun, and the prosperity of the gene sequencing industry will be improved; 2) Focus on spatiotemporal omics and nanopore new business incremental opportunities; 3) The loss on the profit side is expected to gradually narrow.

Event

The company released the third quarter report of 2024

On October 30, the company released the third quarter report of 2024, and the revenue of Q1-3 in 24 was 1.869 billion, a year-on-year increase of -15.19%; net profit attributable to the parent company -463 million, a year-on-year increase of -134.28%; net profit after deducting non-attributable to the parent company was -497 million, a year-on-year increase of -104.56%.

24Q3 achieved revenue of 660 million in a single quarter, a year-on-year increase of -13.22%; net profit attributable to the parent company -165 million, a year-on-year increase of -65.54%; net profit after deducting non-attributable to the parent company was -173 million, a year-on-year increase of -60.82%.

Brief comment

The performance is in line with expectations, focusing on the recovery of downstream demand The

company achieved revenue of 1.869 billion in Q1-3 of 24, a year-on-year increase of -15.19%; net profit attributable to the parent company -463 million, a year-on-year increase of -134.28%; net profit after deducting non-attributable to the parent company was -497 million, a year-on-year increase of -104.56%. 24Q3 achieved revenue of 660 million in a single quarter, a year-on-year increase of -13.22%; net profit attributable to the parent company -165 million, a year-on-year increase of -65.54%; net profit after deducting non-attributable to the parent company was -173 million, a year-on-year increase of -60.82%. The decline in the main business income is expected to be mainly caused by the short-term fluctuations in downstream demand, the overseas macro environment and geopolitics, and the profit side is still in a state of loss, mainly due to the fact that the company is still in the growth stage of large R&D investment, and at the same time, overseas market expansion and team building need corresponding sales investment, 24Q3 single-quarter R&D expenses of 182 million yuan, sales expenses of 224 million yuan, resulting in a single-quarter loss of slightly expanded year-on-year. The results were generally in line with expectations.

From the perspective of sub-sectors: 1) Gene sequencer business: short-term fluctuations in downstream demand, and multi-field cooperation continues to advance. From the perspective of 24H1 sub-regions, the domestic revenue of the company's gene sequencing business was -2.2% year-on-year, -42.31% year-on-year in the Asia-Pacific region, -6.24% year-on-year in Europe and Africa, and +13.18% year-on-year in the Americas region.

Domestic demand is mainly affected by short-term fluctuations in downstream demand, and at present, downstream demand is gradually recovering, and we expect a quarter-on-quarter performance to be similar. In September 24, three domestic gene sequencers applied for by Beikang Medical, Golden Key Zhizao and Jiyinga were approved by the NMPA (all of which are three types of medical devices), and the above three gene sequencers are based on the company's DNBSEQ technology. At present, 22 of the 36 gene sequencers approved in China are based on the company's DNBSEQ sequencing technology, and the subsequent domestic market penetration is expected to continue to increase. The Asia-Pacific region is expected to remain under pressure year-on-year in Q3 due to the high base of some previous large population genomics projects. Overseas, the company has previously landed localized offices and customer experience centers in Australia, Singapore, Japan and other places, and has landed customer experience centers and marketing centers in Brazil, the United States and Europe in 24 years. At present, the global marketing center has completed the distribution of key areas, and the cooperation with downstream customers in many fields is continuing to advance, and it is expected to gradually see an improvement trend on the performance side in the future.

2) New product progress: The nanopore gene sequencer was officially released. In September 2024, BGI Group officially released two nanopore sequencers, the CycloneSEQ-WY01 and CycloneSEQ-WT02, based on CycloneSEQ sequencing technology. Among them, WY01 is a high-throughput nanopore sequencer, which is equipped with a high-throughput high-density chip with a longer read length, which can be applied to scenarios such as large genomes, human genome resequencing, full-length transcriptome sequencing, and epigenetic detection. The WT02 is a medium-throughput nanopore gene sequencer, which is portable, has low cost of single sequencing, does not require sample mixing, and can output sequencing results in real time, which is suitable for scenarios such as amplicon sequencing, metagenome sequencing, small genome whole genome sequencing, and low-depth human whole genome sequencing. The WT02 is currently available to order, and the WY01 is scheduled to be available in the first half of 2025. The company has obtained the global market distribution right of BGI sequenced nanopore sequencing products in June 24, and nanopore sequencing can form a good complement to the company's NGS sequencing products, and is optimistic about the follow-up market development potential.

The gross profit margin continued to increase, and the expense side was still in the stage of high investment. 24Q1-3 The company's gross profit margin was 61.47%, +1.72 pct year-on-year; The Company's gross profit margin continued to improve despite the impact on the overall performance of the revenue side, which we expect to be related to the continuous promotion of localization on the production side and the increase in the gross profit margin of the core sequencing business. 24Q1-3 The company's sales expense ratio was 33.8%, +8.38 pct year-on-year, mainly due to the company's continuous implementation of the internationalization strategy, improving market coverage and product accessibility, the company's business currently covers more than 100 countries or regions on six continents, and has set up more than 10 customer experience centers around the world. The administrative expense ratio was 21.38%, +5.41 pct year-on-year. The R&D expense ratio was 29.61%, +0.47 pct year-on-year, and the absolute value of R&D expenses was -13.80% year-on-year.

The finance expense ratio was -1.18%, +2.46 pct year-on-year, which we expect to be related to the impact of foreign exchange gains and losses on the company's overseas revenue. 24Q1-3 net cash flow from operating activities was -850 million yuan, compared with -892 million yuan in the same period last year, and the operating cash flow situation has improved, and the cash flow situation is expected to gradually improve with the gradual reduction of the profit side. The rest of the financial indicators are basically normal.

Future prospects: 1) The overseas interest rate cut cycle has begun, and the prosperity of the gene sequencing industry has improved: from the perspective of 24H1, the procurement demand of the gene sequencing industry has fluctuated in the short term, and the equipment sales of other leading companies in the industry, such as Illumina and Pacbio, have been slightly affected, but the sequencing activities are still active Downstream demand is expected to continue to improve; 2) Focus on new business incremental opportunities for spatiotemporal omics and nanopores: In June 24, the company announced that it intends to sign the "Intellectual Property Licensing Agreement" and related "Distribution Agreement" to obtain the intellectual property rights of spatiotemporal all-in-one machines, microscopes, spatiotemporal visualization reagent sets and related products, as well as the global market distribution rights of single-molecule nanopore sequencer equipment and reagent consumables and other related products. The spatiotemporal omics products are highly synergistic with the company's DNBSEQ sequencing platform, and the nanopore sequencer is a powerful supplement to the company's current next-generation sequencing products. 3) The loss on the profit side is expected to gradually narrow: The company continues to promote the improvement of quality and efficiency to bring savings on the cost side, and in the future, with the recovery of the demand side and the growth of the revenue side driven by the superposition of new business opportunities, the company's profit loss is expected to gradually narrow.



Profit forecast We forecast that from 2024 to 2026, the company's revenue will be 25.5, 29.8 and 3.52 billion yuan, respectively, a year-on-year increase of -12.4%, 16.9% and 18.1%; The net profit attributable to the parent company was -5.17, -274 million and 81 million yuan respectively. The equivalent EPS was -1.24 yuan/share, -0.66 yuan/share and 0.19 yuan/share respectively. The company is still in the growth stage, and the R&D investment is large, and the overseas market expansion and team building also need corresponding sales investment to increase the global market share, which may affect the short-term profit release. Based on revenue indicators, the company's market share in domestic and overseas markets has been increasing in recent years, and for companies in the rapid growth period, the company's corresponding PS in 2024-2026 is 7.9X, 6.7X and 5.7X, which is generally 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 currently actively exploring overseas markets, the introduction of new businesses such as spatiotemporal omics and nanopores is expected to bring incremental performance, and the "buy" rating is maintained.

Risk Warning

Patent litigation risk: Gene sequencing-related instruments and consumables are in the upstream of the gene sequencing industry chain, and on the whole, the entry barriers are high, and related companies have more patent layouts. The Company has previously engaged in patent litigation with Illumina in many countries and regions around the world, and if the outcome of the litigation or settlement is not as expected, it will affect its business development in the relevant regions. In addition, it cannot be ruled out that the previous litigation may affect the future development of overseas litigation-related product business.

Overseas geopolitical risks. On January 29, 2024, the company issued a clarification announcement saying that the company was mentioned in a recent draft of the BIOSECURE Act proposed by the United States. According to the company's announcement, the company's overseas revenue accounted for 33.75% of the current operating income in 24H1, of which the United States regional business accounted for 5.04%, and the company's sequencing business overseas revenue mainly came from the Asia-Pacific region and Europe and Africa. At present, there are still many uncertainties between the "Biosecurity Act" and the final legislation, but relevant public opinion may bring bad expectations to the company's market development and increase the difficulty of market development. If the subsequent bill is passed, it may have a certain impact on the company's overseas business development.

Risks of intensifying market competition and new technology updates and substitutions: In recent years, the gene sequencer industry has continued to have start-ups entering, and market competition may intensify in the future with technology iteration and new technology breakthroughs.

Overseas business promotion is not as expected: After the company settles 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, which have established a mature R&D system and a global marketing network, and have a good brand image and popularity. The company's overseas business promotion is less than expected, which will slow down the growth rate of the company's gene sequencer segment.

Business growth and profitability are less than expected: At present, the company's downstream gene sequencing industry mainly includes scientific research and clinical users, and gene sequencing has been abundantly applied in the field of scientific research and has gradually entered a mature stage, and there are still many new applications in the development of clinical ends. In addition, the company has invested heavily in R&D and sales at this stage, and fluctuations in business growth may affect its profitability.

Related-party transaction risk. The company's 23-year related party revenue accounted for 26.21%, and if the related party procurement declines significantly in the future, the company's performance may be adversely affected. In addition, the company and related parties previously had a certain amount of advances, but mainly for electricity, rent, etc., and accounted for less than 1% of the current revenue, which had little impact on the company's overall operation.