Incidents:

On August 29, 2023, Hongri Pharmaceutical released its 2023 Interim Report: In the first half of 2023, the company achieved revenue of 3.423 billion yuan (+3.38%), net profit of 346 million yuan (-1.92% YoY), net profit of 320 million yuan after deducting non-return net profit of 320 million yuan (+2.75% YoY).

Investment highlights:

Chinese medicine formula granules were close to flat year-on-year in the first half of the year, and profits recovered strongly in the second quarter. In 2023H1, the company achieved revenue of 3,423 million yuan (+3.38% year on year), net profit of 346 million yuan (-1.92% year on year), net profit of not attributable income of 320 million yuan (+2.75% year on year). Among them, in 2023Q2, the company achieved revenue of 1,764 million yuan (+11.73% YoY), net profit of 170 million yuan (+48.96% YoY), net profit of 163 million yuan after deducting non-return net profit of 163 million yuan (+51.03% YoY). 2023H1 Chinese medicine formula granules and tablets achieved revenue of 1,589 million yuan (-2.46% year on year); Xuebijing injection revenue in the first half of the year was 521 million yuan (+102.71% YoY); oximeters are expected to be affected by the base figure, and performance is relatively pressured.

We are optimistic about the month-on-month improvement of formula particles and the elasticity of the company's performance. The number of types of formula granules has gradually increased. As of August 2023, the Drug Administration has issued a total of 265 national drug standards for traditional Chinese medicine formula granules. The increase in the number of national standard varieties and the deepening of switching will promote the recovery of prescriptions. At the same time, it will also gradually reduce the negative impact of provincial standard protection in some regions, and the benefits for leading enterprises will gradually become apparent. Therefore, we are optimistic about the month-on-month improvement in formula granule sales and promoting the recovery of the company's performance.

Profit forecasts and investment ratings take into account the current slow progress of the national standard for formula granules affecting normal sales. We adjusted the company's net profit for 2023-2025 to 726/882/1,078 million yuan, corresponding to the current stock price PE of 18.18/14.95/12.24 times. Due to the insufficient number of varieties, the number of prescriptions for formula granules has not returned to the same period in the short term; in the long run, the number of provinces supporting health insurance and the opening of sales terminals will promote the expansion of the traditional Chinese medicine formula granule industry, be optimistic about the long-term market space after the implementation of the national standard for formula granules, and maintain the “buy” rating.

Risks suggest that the national standard for formula granules fell short of expectations; the formula granule collection process and price reduction exceeded expectations; the epidemic affected business operations; increased competition; macroeconomic development fell short of expectations; pharmaceutical policy risks, etc.