Pharmaceutical intermediates and animal protection API business is under pressure, the first half of the year home net profit decreased 28% compared with the same period last year. The company achieved an operating income of 2.81 billion yuan in the first half of 2023, + 3.93% over the same period last year, and realized a net profit of 357 million yuan attributable to the owner of the parent company,-27.79% over the same period last year, of which Q2 operating income was-8.32% to 1.4 billion yuan compared with the same period last year. The net profit attributed to the owner of the parent company was-44.75 to 163 million yuan. With the promotion of production capacity and market expansion, the company's pharmaceutical and animal protection plate sales still maintained rapid growth in the first half of the year, however, affected by intensified competition in the industry and depressed demand downstream, the market prices of key pharmaceutical intermediates (sodium borohydride, potassium borohydride) and animal protection raw material products (florfenicol, doxycycline) declined significantly in the first half of the year, so the company's overall revenue increased slightly and profits were under pressure obviously.

The sales volume of the company's pharmaceutical and animal protection API business has maintained growth, and the pharmaceutical intermediate business has a solid market position.

In the pharmaceutical sector, mainstream pharmaceutical API products maintained a strong growth momentum in the first half of the year, featured API products continued to enrich, cephalosporin product series in certification, customer association, market expansion have made positive changes; key pharmaceutical intermediate business affected by 2022H1 high base, downstream demand downturn and intensified competition in the industry, the sales volume and prices of some products are under pressure compared with the same period last year, but the market position is still stable. In terms of the animal protection plate, doxycycline hydrochloride benefited from the release of production capacity, and sales continued to grow rapidly. at the same time, the product line of animal protection APIs was gradually enriched and improved, however, considering that the domestic veterinary drug market was in the doldrums in the first half of the year, the company's animal protection raw material business is expected to be under pressure on price performance, which may suppress profit performance.

It is estimated that 6000 tons of solid sodium borohydride, 2000 tons of florfenicol and 1500 tons of doxycycline will be built in 2023. At present, the company is committed to promoting the full-chain operation of core products, and the construction of key projects, including fund-raising projects, has progressed steadily in the first half of 2023, in which the first phase of the florfenicol project with an annual output of 4500 tons has entered the critical stage of equipment installation. the second phase of the project with an annual output of 1500 tons of doxycycline has completed trial production and entered the stage of acceptance and certification. The construction of sodium borohydride series product project has entered the stage of equipment installation and adjustment, and the total production capacity is expected to reach 10,000 tons according to the previous plan. In the future, with the doubling of core product production capacity, the company's business scale is expected to expand steadily, and based on the medium-term recovery expectation of the breeding sector, we believe that the company's animal protection sector is expected to benefit from the improvement in downstream demand in the future, so as to maintain a good profit.

Risk hints: the risk of another sharp rise in raw material and energy prices; the risk of a sharp decline in sales of pig veterinary drug products caused by African classical swine fever; and the risk that the scale of downstream farming is less than expected.

Investment suggestion: the company is committed to promoting the full chain operation of the core single product of animal protection raw materials, the scale of core business is expanding steadily, and the medium-term prosperity of downstream breeding is expected to be good. We are optimistic about the quantitative growth of the company's animal protection sector in the future. Taking into account the obvious short-term pressure on the sales price of the company's pharmaceutical intermediates and animal protection API products, we reduced the company's net profit from 2023 to 2025 to RMB 8.5 billion, 11.7 billion, 1.38 billion yuan, respectively, compared with the same period last year. 8.2%, 37.8%, 18.8%, 18.8%, respectively, and the "buy" rating is maintained.