Performance: Steady growth in revenue and profit in Q2

2022H1: The company achieved operating income of 80 billion yuan, an increase of 27.7% over the previous year; the net profit of Guimo was 290 million yuan, an increase of 27.8% over the previous year; after deducting the net profit of the non-return mother was 270 million yuan, an increase of 22.8% over the previous year.

2022Q2: The company achieved operating income of 430 million yuan, an increase of 22.3% over the previous year; net profit of 130 million yuan, an increase of 21.1% over the previous year; after deducting net profit of Fugimo, 120 million yuan, an increase of 19.6% over the previous year. We believe the company's profit growth in 202H1 and Q2 is in line with our expectations.

Growth analysis: product registration+acceleration of overseas market development

By business, the company's 2022-H1 antibiotic revenue was 170 million yuan, up 5.7% year on year; anti-allergy drug revenue was 180 million yuan, up 32.8% year on year; cardiovascular drug revenue was 140 million yuan, up 18.5% year on year; non-steroidal anti-inflammatory drug revenue was 110 million yuan, up 46.4% year on year; and digestive tract drug revenue was 110 million yuan, up 61.4% year on year.

Accelerated product declaration & registration: According to the company's interim report, “Currently, 63 products in the field of generic drug development have been approved for domestic production, 79 are approved for sale abroad; 70 products are being reviewed at home and abroad; it is estimated that more than 80 products will be accepted for listing this year.” We are optimistic that the company's increasingly diversified and international pharmaceutical product lineup will open up the company's medium-term growth space.

Market layout at home and abroad is accelerating: According to the company's interim report, “At present, the company's marketing network has covered more than 15,000 medical institutions in all provinces, cities and autonomous regions of the country, including more than 5,000 hospitals and specialist hospitals of grade 2 and above and more than 10,000 primary medical institutions, with more than 1,000 dealers and distributors”, “We have signed exclusive regional sales contracts with many dealers in more than 20 countries and regions, including the United States, Germany, and the United Kingdom”. We are optimistic that the company's marketing network layout at home and abroad will help the company open up domestic & export space for formulations.

Profitability analysis: The gross margin level declined slightly year on year. Interest on convertible bonds affected financial expenses 202H1 gross margin was 75.5%, down 2.2 pct from the previous year; the cost rate analysis of the period showed that the 2022H1 R&D expenses ratio was 16.6%, down 0.9 pct from the previous year; the sales expenses ratio was 12.8%, down 0.9 pct from the previous year; the management expense ratio was 6.1%, down 0.6 pct from the previous year, and the financial expense ratio was 4.8%, up 2.8 ct year on year, mainly due to the impact of interest on convertible bonds (according to company announcements, 2022H1 interest) Expenses are about 32.296 million yuan, and 2021H1 interest expenses are about 142.15 million yuan); under the influence of the above factors, the company's 202H1 net interest rate increased 0.02 pct year-on-year. Taking into account changes in the gross margin of the company's products, the company's R&D investment, and sales channel construction, we expect the net interest rate to increase slightly in 2022-2024 and maintain it basically.

Analysis of the quality of operations: It is recommended to focus on the steady pace and growth of projects under construction supporting the company's operating activity cash flow of 800 million yuan in 202H1, an increase of 26.9% over the same period, slightly lower than the revenue growth rate during the same period; the cash outflow from operating activities was 730 million yuan, an increase of 28.4% over the previous year, resulting in net cash flow from the company's operating activities of 71 million yuan, an increase of 13.9% over the previous year. Judging from the cash flow transformation of revenue and profit, the company's “cash received from selling goods to provide labor services” increased from 95.0% in 202H1 to 202H1 97.2%; Judging from supplementary information on the cash flow statement, the company's operating receivables and accounts payable items 202H1 collectively dragged down cash flow by 190 million yuan, and the increase in inventory dragged down 120 million yuan in cash flow.

Furthermore, we are concerned that the cumulative investment in projects such as “1.5 billion tablets/granule/bag production line and R&D center construction project for pharmaceutical products with an annual output”, “freeze-dried water needle and pre-filled needle project”, “small synthesis test, eye drop workshop, ointment workshop project”, and “European and American standard injection production line expansion project” is progressing relatively fast and close to the standard. We suggest paying attention to the company's growth space for domestic and foreign formulations as production capacity is released and registration is promoted in an orderly manner.

Opinion: Continued optimism about the acceleration of pharmaceutical exports and the increase in domestic pharmaceutical market share

We are optimistic about the company's breakthroughs in innovative fields, starting with difficult dosage forms and improved dosage forms. We suggest paying attention to the company's progress in clinical, review, and cooperative research and development in the fields of 505b (2) and difficult delivery dosage forms. We are optimistic about the diversified product echelon formed under new varieties and new production capacity. Cooperation between large varieties and innovative varieties is expected to open up room for growth. We continue to be optimistic about the acceleration of the company's pharmaceutical exports and the increase in the domestic pharmaceutical market share.

Profit forecasting and valuation

Considering the pace of product registration and volume, we lowered our profit forecast for 2022-2024. EPS was 1.32, 1.71, and 2.17 yuan/share respectively (previous value 2022-2023 was 1.67 and 2.25, respectively), and the closing price on August 30, 2022 corresponds to 21 times PE in 2022. We are optimistic that the production capacity of the company's new workshop will continue to be released, the ANDA registration and application capacity will continue to improve, the valuation cost performance ratio is obvious, and the “increase in holdings” rating will be maintained.

Risk warning

Production safety accidents and quality risks; risk of flow of core pharmaceutical products or sales falling short of expectations; risk of exchange rate fluctuations; risk of order delivery volatility; risk of changes in pharmaceutical regulatory policies.