Key points of investment

Incident: 2023H1, the company achieved revenue of 855 million yuan (-2.07%, down 2.07% year on year, same below), net profit of 107 million yuan (+68.86%), net profit of non-attributable income of 87 million yuan (+118.9%). Excluding the impact of Baijun's listing, revenue for the first half of the year increased 17% year-on-year over the same period last year.

In Q2 alone, the company achieved revenue of 418 million yuan (-7.11%), net profit of 43 million yuan (+48.11%), net profit of non-attributable income of 38 million yuan (+147.96%). The results were in line with our expectations.

After focusing on the main business of innovative traditional Chinese medicine, the advantages of the company's product cluster were evident. In 2023 H1, the main industrial sector maintained steady growth, achieving revenue of 767 million yuan (+14.8%). Product sales revenue in the “338 Project” increased by more than 50% year-on-year: Strong Loquat Cream (Honey), Strong Loquat Dew, Lysine Vitamin B12 Granules, Putiblue Anti-inflammatory Tablets, and the new Ginseng Antler Oral Liquid. Although garcinia cambogia tablets were affected by the epidemic and collection, the first half of the year was still the same as the same period last year. Xuanqijian Bone Tablet, an innovative orthopedic traditional Chinese medicine product, has been added to cover 456 public medical institutions. It achieved sales revenue of nearly 10 million yuan in the first half of the year, and is expected to gradually grow into another major product in the company's orthopedic field. The taste problem of pediatric jingxing cough relief granules has been solved. In terms of channel development, pediatric jingxing cough relief granules have been newly covered by 142 public medical institutions. As of 2023H1, coverage of more than 1,000 public medical institutions has been completed, and it is expected that the release will accelerate in the future.

The company's net interest rate is increasing at an accelerated pace. In the context of collection, the gross margin of some products has declined, but the sales expenses ratio has also declined. In 2023H1, the company's net sales interest rate increased to 12.4% (+6.76pct, up 6.76pct from H1 in 2022, same below), mainly due to the divestment of Baijun Medical and more detailed management of sales expenses. The 2023H1 company's cost of sales ratio declined to 42.1% (-3.73pct). Teng Wangge Pharmaceutical relied on the product advantages of powerful loquat cream (honey refining), and based on increased productivity, 2023H1 achieved sales revenue exceeding 100 million yuan, net profit exceeding 27 million yuan, and outstanding performance. In the future, the company is expected to gradually deepen the layout of the second and third terminals (that is, the out-of-hospital retail market and the primary hospital market) and promote the development of OTC products, collected chemical drug types, etc. in the out-of-hospital market.

Profit forecast and investment rating: Considering the rapid increase in net interest rates in the first half of 2023, we raised our net profit forecast for 2023-2025 from 163/236/303 million yuan to 173/237/310 million yuan. The PE corresponding to the current market value is 24/17/13X. Maintain a “buy” rating.

Risk warning: Risks such as product volume falling short of expectations, policy risks, and increased market competition.