The influence of epidemic situation and collection on profits in the first half of the year is obvious. In the first half of 2022, the company achieved a revenue of 1.464 billion yuan (yoy-23.23%) and a net profit of 40 million yuan (yoy-93.39%), mainly because the epidemic affected the upstream production and delivery, and the profits were under pressure due to the price reduction of pharmaceutical collection. As a result of the decrease in sales of high-margin products, the overall gross profit margin decreased by 8.40pcts to 68.50%, the R & D expense rate increased by 13.74pcts to 31.23%, the sales expense rate increased by 2.00pcts to 15.68%, and the management expense rate increased by 7.27pcts to 21.88%, mainly due to the increase in the cost of business activities such as corporate cooperation and acquisitions. The financial expense rate also increased by 5.96pcts to 6.79%, driving the return net interest rate to 29.30pcts to 2.76%. The net operating cash flow at the end of the period also decreased by 39.06% to 375 million yuan, inventory decreased by 2.04% to 701 million yuan compared with the beginning of the year, and trade and other receivables increased by 21.02% to 1.494 billion yuan compared with the beginning of the year.

Medical and beauty business: from agency to self-research integration, to create a full product matrix. The 2022H1 Medical and Beauty sector achieved a revenue of 99 million yuan (yoy-61.80%), accounting for 6.7% of the total income, and a net profit of 42 million yuan (yoy-79.11%), mainly due to the shrinking terminal consumption and blocked logistics under the influence of the epidemic. Yan Yan Space, a subsidiary of Medical Beauty, accelerates the integration of research and production. 1) R & D: nearly 20 self-developed skin dressing products have been certified by FDA II, and nearly 10 self-developed III products have been promoted in an orderly manner.

Becton Dickinson & Co project covers filling, support, replenishment, optoelectronics, skin management full category, have won South Korea VIOL's SYLFIRMX gold microneedle, Switzerland Suisselle's Cellbooster water light needle, South Korea Hugel's hyaluronic acid products Platinum Enrun exclusive agency, and with Blue Crystal microorganism to establish a joint venture to develop PHA microspheres and other regenerative medicine materials, continue to increase investment in Shenzhen Yimei to introduce its ultrasound technology and hot and cold fat dissolving system, and further improve the layout of medical products. 2) production side: speed up the automation process to reduce cost and increase efficiency. 3 major production bases and 10 production lines have been set up to realize the industrialization conversion of pre-irrigation, freeze-dried powder needles, active equipment and dressings. 3) sales side: upgrade the sales model with the overall layout of direct marketing and distribution, covering more than 280cities, more than 2920 medical institutions and 100% coverage of top 500 institutions by the end of July.

Pharmaceutical business: innovation and change under the background of collection and acquisition, and promote the stripping of generic drugs. Company landing raw material drug + preparation integration CDMO two-wheel drive strategy, 1) CDMO:2022 achieved revenue of 133 million yuan (yoy-4.95%) in the first half of the year. The company has introduced three epidemic solution providers, and has 20 + characteristic APIs that can be sold internationally. Advantageous varieties such as Lacosamide and tenofovir dipyrifurol axetil tablets can be released rapidly under the demand of collection. 2) generic drugs: the revenue in the first half of 2022 was 1.233 billion yuan (yoy-18.30%) and the net profit was 683 million yuan (yoy-25.37%). Under the starting point of the new health care reform, the company plans to divest and sell generic drugs and other non-core pharmaceutical businesses that do not meet business expectations or do not meet long-term strategic objectives within the next 12-24 months, adjust the overall profit structure and focus group resources on high profit margins and growth sectors, and implement the two-wheel drive strategy of Mimi + biopharmaceuticals.

Xuanzhu biological spin-off listing continues to update, biopharmaceutical plate refinancing. 1) Xuan bamboo biology: it has 25 + products under research in the fields of oncology, metabolism, digestion and so on, of which the application for listing of fluorovir group has been accepted, nearly 10 products such as double anti-drug KM257 are in the clinical stage, and the layout of long, medium and short pipelines is perfect. At present, the Stock Exchange has approved the application for spin-off of Xuanzhu Bio and listing on the Shanghai Stock Exchange Kechuang Board, with a post-investment valuation of nearly 7 billion yuan. 2) Hui Sheng Biology: the whole product covers the field of diabetes and complications, with nearly 40 products of different stages. The applications for marketing of the fourth generation Degu Insulin injection and Mendong Insulin injection have been accepted. Degu Mendong double Insulin injection is in the clinical stage of Ⅲ, and the production capacity of 120 million units can be achieved after the construction of the first and second phase of biology is completed. At present, Huisheng Bio has completed 500 million yuan A round financing, with a post-investment valuation of 5 billion yuan.

Profit forecast and investment suggestions: the company is temporarily under pressure during the painful period of transformation, the optimization of business structure is conducive to the gradual release of marginal improvement, and continue to pay attention to the development of high-quality pipelines and innovative drug development contributions. Based on some business optimizations such as the spin-off of generics, we adjust and forecast that the company will achieve revenue of 2.829 million yuan and net profit of-0.57 million million in 2022-2024 respectively, downgrading to "overweight" rating.

Risk hints: the impact of collection policy, repeated epidemic situation, new product research and development and promotion are not as expected.