Affected by the epidemic, 2020H1's performance continued to be under pressure: the company's revenue in the first half of 2020 fell 18.6% year-on-year to 766 million yuan, mainly due to the decline in revenue from medical imaging contrast agents, maternal and child series, and jade medicine divisions caused by the epidemic. Gross margin fell 16.8 per cent year-on-year to 572 million yuan, thanks to changes in product sales structure, gross profit margin rose 1.6pp to 74.6 per cent year-on-year. Sales expenses fell 18.3% year-on-year to 224 million yuan, while sales expense rate rose slightly 0.2pp to 29.3% year-on-year. The company continued to strengthen its R & D investment, the management cost increased by 13.0% to 102 million yuan compared with the same period last year, and the management expense rate rose sharply to 13.4% 3.8pp. Net profit fell 16.3 per cent year-on-year to 209 million yuan, while net profit margin rose 0.8pp to 27.3 per cent.

The kidney disease series developed steadily, and the admission of the new imaging product iopropanol was progressing smoothly: during the period, the revenue of kidney disease products increased by 4.9% to 542 million yuan over the same period last year, accounting for 70.7% of the total income, and the business accounted for a substantial increase in 15.9pp compared with the same period last year. Among them, Niaoduqing granule has completed the research on evidence-based medicine and has been included in the catalogue of long-term prescription drugs in Hainan Province during this period, considering that this product is the exclusive variety of proprietary Chinese medicine and ranks first in the market share of oral proprietary Chinese medicine for kidney disease for a long time. Despite the general trend of national drug volume procurement, we believe that this product is expected to gain certain market competitiveness by virtue of its uniqueness. In addition, the new imaging product iodopamol injection was officially put into clinical use in April this year, and has entered 24 hospitals within three months, with sales of about 5000 bottles, which is expected to become a new growth driver.

The "brand + channel + terminal" rectification strategy of Jade Pharmaceutical has been carried out smoothly, and the product portfolio of the research and development pipeline has been diversified: the rectification and reform plan of the Jade Pharmaceutical Division is progressing smoothly, and the income in the first half of 2020 increased by 57.8% to 102 million yuan. By June 2020, the number of Yuyao drugstores nationwide has reached 305000, the strategic layout of "brand + channel + terminal" of Yuyao has gradually landed, and the brand effect has gradually appeared. For example, the market share of Yuyao Zhenggushui for external use of analgesic drugs in Guangdong and Guangxi increased by 1.38% and 1.45% respectively compared with the same period in 2018. In terms of terminal control, 9749 core stores have been established and 125 training sessions have been carried out to enhance the professional ability of shop assistants and the shopping experience of consumers. In addition, the company focuses on kidney disease and imaging in the research pipeline, most of them are chemical varieties, and the R & D efficiency is relatively high. Many varieties are expected to be produced or approved for listing in 2022, and the coverage of the company's product portfolio is expected to be further improved.

Maintain the target price of HK $6.00, buy rating: taking into account the short-term impact of the epidemic, jade drug rectification effect, we believe that the company is expected to return to endogenous growth in the next 3 years, profitability is expected to improve. We have adjusted our earnings forecast for 2020-2022 to maintain the target price of HK $6.00, corresponding to a price-to-earnings ratio of 11 times earnings in 2020, which is 75.4% higher than the current price.