The results for the first half of 2023 are in line with our expectations
The company announced its results for the first half of 2023: revenue of 3,946 million yuan, up 30.91% year on year; net profit of 368 million yuan, corresponding to profit per share of 0.29 yuan, up 15.65% year on year. 1H23 results are in line with our expectations.
Development trends
Core products resumed a healthy growth trend in the first half of 2023. This year, the company further promoted a series of marketing-themed activities such as “Operation Radiance” and “300 Years of Imperial Medicine”, continuously improving marketing capabilities and increasing product market coverage. In the first half of 2023, sales of the Cold Clear Heat Granule Series, Shengmai Drink Series, Ejiao Series, Jin Cui Kidney Gas Pill Series, and Bovine Yellow Detox Tablet series increased by 158.11%, 70.86%, 55.88%, 22.78%, and 13.36% year-on-year. Benefiting from the “big variety” development strategy, sales revenue from products such as the Zhibai Dihuang Pill series and the Aconitum Pill series all achieved double-digit growth compared to the same period last year.
The subsidiary maintained a healthy growth trend. In the first half of 2023, Tong Ren Tang Sinopharm's revenue was 725 million yuan, up 39.00% year on year, and GuiMu's net profit was 236 million yuan, up 32.55% year on year. The total revenue of South Third Ring Road Pharmacy and Tong Ren Tang No. 2 Hospital of Traditional Chinese Medicine was 125 million yuan, an increase of 32.76% over the previous year. The revenue of the six subsidiaries engaged in the production of raw materials for Chinese herbal medicines was 176 million yuan, an increase of 14.23% over the previous year.
Others: 1) In the first half of 2023, gross margin fell 3.2 percentage points year on year to 39.7%, mainly due to rising raw material costs, but we expect the company to further strengthen raw material control in the second half of the year; 2) Net return interest rate fell 1.2 percentage points year on year to 9.3% year on year; 3) The sales expense ratio was 15.7%, down 0.8 percentage points year on year, and the management expense ratio was 7.9%, up 0.4 percentage points year on year.
Profit forecasting and valuation
We maintained our net profit forecasts of $0.51 and $0.57 per share for 2023 and 2024, up 13.1% and 11.3% year-on-year. The current stock price corresponds to 2023/2024 10.2 times/8.9 times the price-earnings ratio. We maintained our outperforming industry rating and maintained a target price of HK$7.95, corresponding to a price-earnings ratio of 13.1 times/11.4 times in 2024/2024, with 28.2% upside from the current stock price.
risks
Sales of new varieties fell short of expectations, and depreciation pressure on the two new production sites.