The first half of 2022 results are in line with our expectations

The company announced its results for the first half of 2022: revenue was 3.01 billion yuan, up 9.0% from the same period last year, up 14.4% from the previous year; net profit from its mother was 318 million yuan, corresponding to a profit of 0.25 yuan per share, up 0.9% from the same period last year, up 66.0% from a month earlier, in line with our expectations.

Trend of development

Potential products will grow brightly in the first half of 2022. Except for the revenue of Ganmao Qingre granule series and Xihuang pill series, the sales revenue of Liuwei Dihuang Pill series, Jinkui Shenqi Pill series, Niuhuang jiedu tablet series, Jiawei Xiaoyao Pill series, Shengmai Yin series and Ejiao series increased by 17%, 7%, 5%, 66%, 26% and 30% year-on-year. At the same time, benefiting from the large variety development strategy, the sales revenue of Niuhuang Jiangya Pill series, Zhibai Dihuang Pill series, Qiju Dihuang Pill series, Fuzi Lizhong Pill series and other products have all achieved double-digit growth compared with the same period last year.

Some subsidiaries were affected by the epidemic, but are expected to recover in the second half of the year. In the first half of 2022, Tongrentang's national pharmaceutical revenue was 520 million yuan, down 11.2% from the same period last year, and its net profit was 180 million yuan, down 19.9% from the same period last year. We expect the Hong Kong market to gradually recover in the second half of the year. In the first half of 2022, the total revenue of the South third Ring Road drugstore and Tongrentang second traditional Chinese Medicine Hospital was 94.119 million yuan, down 2.2% from the same period last year, and the net profit was 5.211 million yuan, an increase of 17.4% over the same period last year.

Other: 1) in the first half of 2022, the gross profit margin fell 2.2 percentage points from the same period last year to 42.9%; 2) the net profit rate dropped 0.8 percentage points to 10.6%; 3) the rate of sales expenses was 16.5%, up 0.2 percentage points from the same period last year; and the rate of administrative expenses was 7.5%, down 0.1 percentage points from the same period last year.

Profit forecast and valuation

We keep our net profit per share forecast for 2022 and 2023 unchanged. 44 yuan (YoY 11.6%) / 0.48 yuan (YoY 9.0%). The current share price corresponds to a price-to-earnings ratio of 9.9 times 2023 / 9.1 times 2023.

We maintain an outperform industry rating, but taking into account the downward shift in the sector's valuation hub, we cut our target price by 14.5% to HK $7.57, corresponding to 14.6 times 2022 price-to-earnings ratio and 13.4 times 2023 price-to-earnings ratio, which is 47.9% upside from the current share price.

Risk

The sales of new varieties are not as expected, and the depreciation pressure of the two new production bases.