The company released its semi-annual report for 2023: operating income for the first half of 2023 was 685 million yuan (-27%), net profit of 88 million yuan (-27%), net profit of non-attributable net profit of 86 million yuan (-33%); sales/management/R&D expenses were 272 million yuan (+34%), 707 million yuan (-3.05%), and 0.86 billion yuan (+4.89%), respectively, with cost rates of 39.65%, 10.38% and 11.34%. As the impact of the pandemic has been eliminated, Q2 has resumed its growth trend: operating income of 399 million yuan (+34%), net profit of 68 million yuan (+47%), net profit of non-return income of 70 million yuan (+31%), after deducting non-return net profit of 70 million yuan (+31%), and is expected to achieve steady growth throughout the year.

Sales of eye drops have increased dramatically, and marketing applications for low-concentration atropine have been accepted. By product, eye drops earned 314 million yuan (+60%), accounting for 46%, mainly driven by ciclosporin dosage; gels/eye ointments achieved revenue of 177 million yuan (+18%) in the first half of the year, accounting for 26% of sales; and medical service revenue of 156 million yuan (-29%), accounting for 23%. The company has three atropine sulfate-related clinical studies. Among them, the marketing application for 0.01% atropine sulfate eye drops has been accepted by the CDE and is being reviewed with priority. It is expected to become the world's first low-concentration atropine eye drop to delay myopia. 0.01% of 2-year clinical trials and 0.2%/0.4% clinical trials are progressing according to plan.

Focus on ophthalmic drug research and development to consolidate core advantages. In the first half of the year, we invested 86 million yuan in R&D, an increase of 5% over the previous year to build a rich pipeline of ophthalmology products. The company's product layout covers ten eye drug subcategories, including dry eye, anti-infection, and anti-glaucoma. A total of 55 approval numbers have been obtained. Of these, 34 products are covered by medical insurance, and 6 products are included in the national essential drug catalogue. New products marketed in the first half of the year include sodium hyaluronate eye drops, trivoprost eye drops, and diquafinxol sodium, which are used to treat corneal epithelial damage, eye pressure reduction, and dry eye, respectively. Voriconazole eye drops are also advanced to phase I and are used to treat fungal keratitis.

Profit forecasts and investment recommendations. It is estimated that the company's EPS in 2023-2025 will be 4.50, 9.69, and 15.69 yuan/share, respectively. The company's atropine progressed smoothly and pipeline reserves were abundant. The company was given 45x reasonable PE in 2023, corresponding to a reasonable value of 202.66 yuan/share, and maintained a “buy” rating.

Risk warning. Pipeline progress fell short of expectations, market competition exceeded expectations, and product volume fell short of expectations.