BGI is one of the few companies in the world with the ability to independently develop sequencers, and is one of the few clinical-grade gene sequencers in the world that can independently develop and mass-produce clinical-grade gene sequencers with different throughput from Gb to Tb. 1. The

sequencer has excellent performance and a complete product matrix to meet the various needs of sequencing customers

After continuous R&D and breakthroughs in core technologies, MGI's current mass-produced sequencer sequencing results are highly consistent with Illumina's, and its clinical flagship product, the DNBSEQ-G99 series, is currently one of the fastest models in the world's same throughput sequencers. The DNBSEQ-T20x2 is the world's highest daily throughput sequencer. The company closely follows the development trend of "ultra-high throughput" and "miniaturization" of gene sequencers, and has built a product matrix of sequencers of various throughput models, from the desktop DNBSEQ E to the large-scale sequencing platform DNBSEQ-Tx, with sequencing throughput from 1-5G to nearly 100T, with rich product types and obvious price gradients to meet the needs of users in different application scenarios.

2. The increase in instrument installed capacity + the increase in utilization rate, and the expected volume of reagents will continue

to improve profitability With the continuous improvement of the company's product capabilities and the continuous growth of gene sequencing business revenue, MGI's gene sequencing business revenue will be approximately RMB1.76 billion in 2022, accounting for approximately 5.2% of the global market share (approximately 3.5% in 2019), and will continue the growth trend in 2023, achieving revenue of RMB2.29 billion (YOY+30.3%). However, compared with Illumina, MGI's reagent consumables ratio (MGI about 60% vs. Illumina about 80%) and the consumption of reagents per sequencer (MGI's average of 540,000 vs Illumina Nova series of $1 million to $1.2 million) have a lot of room for improvement. We believe that: (1) with the increase in the number of customers cooperating with the company, the improvement of MGI's brand recognition, and the increasing number of terminal installations, which has laid the foundation for the subsequent increase in customer reagent consumption; (2) MGI's instrument upgrade has continuously reduced the cost of sequencing, which can further attract partners to develop products based on the DNBSEQ sequencing technology platform, and promote the application of gene sequencing in the fields of tumor precision medicine and pathogenic microbial detection, thereby driving the increase in the utilization rate of the instrument. With the increase in instrument installed capacity + the increase in utilization rate, MGI's gene sequencing reagent consumables are expected to be large-scale, the business structure is expected to be optimized, and the profitability is expected to be further improved.

3. Domestic substitution is expected to accelerate, strengthen overseas layout, and the growth of sequencing business is expected

The domestic market is the cornerstone of the company's sequencer business development, which has shown strong growth resilience in recent years, and the company's sequencing business revenue in mainland China, Hong Kong, Macao and Taiwan will reach 1.443 billion yuan (YOY+24.38%) in 2023.

With the Ministry of Commerce issuing a document in 2025 to include Illumina in the list of unreliable entities and prohibit it from exporting gene sequencers to China, the progress of sequencer localization is expected to accelerate.

In terms of overseas markets, in 2022, the company and Illumina reached a settlement on all pending lawsuits in the United States, and in January 2023, the company began to sell a full range of sequencing products in the United States, and DNBSEQ HotMPS also officially entered the European markets such as the United Kingdom and Germany. In the Americas, the revenue from sequencer-related business was 159 million yuan (YOY+160.27%). According to data from CIC Consulting, the global market size of gene sequencers and consumables in 2022 is about US$4.8 billion, and the proportion of the Chinese market is only 13.1%, with great potential for overseas markets. We believe that with the company's products successively gaining access to overseas markets, overseas business is expected to enter the fast lane of development.

Profit forecast and investment suggestions: We expect the company's operating income from 2024 to 2026 to be 3.210 billion yuan, 3.899 billion yuan and 4.661 billion yuan respectively, with a year-on-year growth rate of 10.3%, 21.4% and 19.6% respectively, and the net profit attributable to the parent company will be -599 million yuan, -81 million yuan and 117 million yuan, an increase of 1.4%, 86.5% and 244.7% year-on-year respectively. Considering the growth of the company's existing products and the potential of overseas markets, it is covered for the first time and gives the company a "buy" investment rating.

Risk Warning: The risk that the market expansion of intellectual property litigation is less than expected; the risk of intensifying market competition; the risk that related-party transactions account for a relatively high proportion; The international geopolitical environment is uncertain and risky.