1H23's performance met our expectations
The company announced 1H23 results: revenue of 9.303 billion yuan, up 57.4% year on year; net profit of 579 million yuan, up 39.9% year on year, in line with our and market expectations.
Development trends
The formula pellet business achieved restorative growth. The 1H23 formula pellet business achieved revenue of 4.931 billion yuan, an increase of 78.5% over the previous year, accounting for 53% of revenue. The gross margin of the sector was 64.1%, an increase of 2.5ppt over the previous year. According to the announcement, 1H23 made every effort to promote product registration and end customer product replacement, continued to strengthen marketing efforts, and sales of formula granules steadily rebounded.
The Chinese medicine tablet business maintained a strong growth trend. 1H23's beverage business revenue was 1,305 million yuan, up 55.1% year on year, accounting for 14% of revenue. The gross margin of the sector was 21.9%, up 2.9ppt year on year.
According to the announcement, 1H23 continues to strengthen collaboration in the production of Chinese medicine tablets, rapidly expand medical terminal coverage, and at the same time actively explore the layout of a traceability system for Chinese medicine tablets. Revenue from traceability tablets has increased significantly, and the tablet frying distribution business has also achieved continuous growth.
The proprietary Chinese medicine business is relatively stable. 1H23's proprietary Chinese medicine business revenue was 2,035 billion yuan, an increase of 15.2% over the previous year, accounting for 22% of revenue. The gross margin of the sector was 59.3%, an increase of 1.1 ppt over the previous year. According to the announcement, the company's proprietary Chinese medicine business is developing well, mainly due to the company's active promotion of cultivating and promoting large clinical varieties. Sales of key clinical products such as Humidification and Detoxification Granules, Yupingfeng Granules, and Jinye Detoxification Granules all increased by more than 50% year-on-year.
Profit forecasting and valuation
Keep the 2023 and 2024 earnings forecasts unchanged. The current stock price corresponds to the price-earnings ratio of 11.9 times/9.1 times in 2023/2024. It maintains the outperforming industry rating, but considering recent fluctuations in the pharmaceutical sector, we lowered the target price by 9.0% to HK$4.26, corresponding to 16.3 times the 2023 price-earnings ratio and 12.5 times the 2024 price-earnings ratio, which has 37.0% upside from the current stock price.
risks
The return on investment in new business falls short of expectations; risk of price reduction.