The main pharmaceutical manufacturing industry has achieved steady growth. In the first half of 2023, the company achieved operating income of 855 million yuan, -2.07% year-on-year, and realized net profit of 107 million yuan, +68.86% year-on-year. Among them, the main pharmaceutical manufacturing industry achieved revenue of 767 million yuan, +14.84% over the same period last year. The company has increased its product promotion efforts, and the market expansion for core products and innovative traditional Chinese medicines has performed well; on the other hand, it has achieved good results in reducing costs and increasing efficiency, and manufacturing costs and sales expenses have declined; furthermore, Baijun Medical, a loss-making subsidiary in the medical service sector, is no longer included in the scope of the consolidated statement. Revenue at the consolidated level declined, but both attributed/non-net profit increased significantly year-on-year. Looking at the Q2 quarter, we achieved revenue of 418 million yuan, -7.11% year on year, and net profit of 43 million yuan, +48.05% year on year.

Focus on the future development direction of the main business. In 2023H1, Teng Wangge Pharmaceutical's performance has repeatedly reached new highs. For the first time, it achieved semi-annual sales revenue exceeding 100 million yuan and net profit exceeding 27 million yuan; Xiangya Pharmaceutical's pharmaceutical sales business developed steadily, main business revenue increased by nearly 15% year-on-year, marketing model changes and team building are beginning to bear fruit. Big Health's business is progressing smoothly, and its various products have entered the market one after another. The sales revenue of the Big Health business has exceeded the revenue for the whole of 2022.

The “338 Big Product Strategy” product group has great potential for endogenous growth. 2023H1. Product sales revenue in the “338 Big Product Strategy” increased by more than 50% year-on-year: Strong Loquat Cream (Honey Refining), Strong Loquat Loquat Loquat Loquat Lotion, Lysine Vitamin B12 Granules, Putiblue Anti-inflammatory Tablets, and New Ginseng Antler Antler Oral Liquid. Most products in the “338 Product Strategy” showed a steady growth trend, further demonstrating the endogenous growth potential of the product group. Furthermore, some of the products owned by the company performed well through consistent evaluations. Sales revenue for its central cerebrovascular drug irbesartan hydrochlorothiazide tablets, digestive system medication omeprazole enteric tablets, and montmorillone all increased by more than 70% year-on-year.

In terms of research and development, the innovative traditional Chinese medicine drug Nolitong granules developed by 2023H1 are currently under review for drug marketing approval. The holder of the company's vitamin C effervescent granules passed the drug GMP compliance inspection after the change.

Cost reduction and efficiency are obvious, and profitability continues to improve. In the first half of 2023, the company's gross sales margin was 69.19% and net sales margin was 12.40%, up 2.44 pct and 6.76 pct respectively over the previous year.

In terms of expenses, 2023H1's sales, management, finance, and R&D expenses were 42.10%, 13.08%, 0.49%, and 4.30%, respectively, compared to -3.74 pct, +0.93 pct, -2.10 pct, and +0.57 pct, respectively. During the reporting period, the company increased cost control and refined marketing efforts, and used gradually mature and stable sales channels and sales personnel to further expand the sales scale, thereby reducing sales expenses.

[Investment advice]

The company is committed to building a health industry group with innovative traditional Chinese medicine as the core. The continuous improvement of the company's core competitiveness is driven by “innovative traditional Chinese medicine research and development” and “management change” on two wheels. The company's revenue growth was slightly lower than our expectations, and net profit growth was better than our expectations. We have lowered the growth rate of cardiovascular medication, increased the growth rate of respiratory medication, and slightly lowered the sales cost rate. We expect the company's operating income for 2023/2024/2025 to be 1,848/21.31/2,438 billion yuan, net profit to be 1.93/2.43/317 million yuan respectively, EPS of 0.44/0.55/0.72 yuan respectively, and corresponding PE 21/17/13 times, respectively. Maintain the “increase in holdings” rating.

[Risk Reminder]

the risk of policy changes;

Increased competition in the market;

M&A integration risk;

Product quality and safety;

New product development risks;