Event: on October 27, 2023, the company released its third quarterly report of 2023.

2023Q1-Q3 achieved operating income of 8.575 billion yuan, an increase of 7.91% over the same period last year, a net profit of 1.759 billion yuan, an increase of 24.35% over the same period last year, and a deduction of 1.64 billion yuan for non-net profit, an increase of 15.84% over the same period last year. In a single quarter, 2023Q3 achieved operating income of 1.784 billion yuan, down 25.02% from the same period last year; net profit from home was 153 million yuan, down 58.26% from the same period last year; and 99 million yuan was deducted from non-net profit, down 72.8% from the same period last year.

The performance is under short-term pressure and is expected to be dragged down by Lianhua clear plague channel inventory.

The operating income of 2023Q3 company has declined, and we speculate that it is mainly dragged down by the inventory of Lianhua Qingwen channel: since COVID-19 's epidemic control was liberalized, there has been a strong market demand for cold and breathing-related drugs. Lianhua Qingwen capsule / granule, the company's core variety, as one of the "three prescriptions and three medicines", has become an important choice for the public. Since 2022Q4, the company has operated with high production capacity and formed a continuous shipping trend. in 2022, the company's sales income of respiratory drugs was 6.872 billion yuan, an increase of 67.29% over the same period last year. In the first half of 2023, the company's sales income of respiratory drugs was 3.088 billion yuan, an increase of 20.95% over the same period last year. With the effective control of COVID-19 's epidemic situation and the sharp decline in market demand, the backlog of channel inventory caused by previous continuous shipments has become a drag, and we expect this impact to continue for some time. According to the company's annual report, basic and clinical studies have confirmed that Lianhua Qingwen has a killing effect on influenza viruses such as H1N1 A, H3N2, avian influenza H7N9, influenza B virus, etc. Since the beginning of this year, the domestic influenza epidemic has occurred frequently, and the channel inventory of Lianhua Qingwen is expected to be digested quickly, and the variety still has high clinical value in the post-epidemic era.

The R & D capability of traditional Chinese medicine is leading in the industry, and the innovation achievements continue to fall to the ground.

The company maintains high-intensity R & D investment and has the industry-leading R & D capability of traditional Chinese medicine, and innovative achievements have been on the ground since 2023. In February 2023, Huoxia Ganmao granule, an innovative traditional Chinese medicine for the treatment of gastrointestinal colds, was approved for clinical trial. In April 2023, the international SCI journal Biomedicine and Drug Therapy (influencing factor 7.419) published a paper entitled "Bazi Bushen delaying epigenetic senescence and prolonging healthy life of natural aging mice". The results showed that Bazi Bushen capsule delayed overall aging by reversing DNA methylation senescence. In July 2023, the innovative traditional Chinese medicine "Shenrong granule" for the treatment of rare amyotrophic lateral sclerosis was approved for clinical trial; in September 2023, the traditional Chinese medicine granule "Lianhuaqingke granule" based on "Lianhua Qingke tablet" was approved for clinical trial. In September 2023, the results of "Evaluation study on compound Endpoint events of Qiliqiangxin capsule in the treatment of chronic Heart failure" were released at the annual meeting of the European Society of Cardiology. Qiliqiangxin combined with standardized treatment reduced the risk of major complex endpoint events of chronic heart failure by 22% compared with the control group, and provided effective therapeutic drugs for improving the long-term prognosis of chronic heart failure. In October 2023, Tongluo Mingmu capsule, an innovative traditional Chinese medicine for the treatment of diabetic retinopathy, obtained the drug registration certificate. In October 2023, the Journal of American Medical Association (JAMA, impact factor 120.7) published a paper entitled "Chinese Tongxinluo Myocardial Protection study on Acute Myocardial Infarction". The results showed that Tongxinluo capsule in addition to the treatment recommended by the guidelines could significantly improve the clinical prognosis of patients with ST segment elevation myocardial infarction (STEMI) for 30 days and 1 year. To provide effective therapeutic drugs for improving the long-term prognosis of acute myocardial infarction. We believe that the company attaches great importance to evidence-based medicine research, this evidence can provide more academic support for sales and promotion, and is an effective boost for the company's long-term growth.

Investment suggestion: we expect the company's operating income from 2023 to 2025 to be 10.488 billion yuan, 11.957 billion yuan and 13.961 billion yuan respectively, and the return net profit to be 1.91 billion yuan, 1.844 billion yuan and 2.38 billion yuan respectively. The corresponding PE valuation level is 19.5,20.2,17.4 times, and the 12-month target price is 27.50 yuan, corresponding to 25 times PE in 2024, giving Buy-An investment rating.

Risk tips: the risk of overstocking of channel inventory; the risk of R & D failure; the risk that new product promotion is not as expected, and the risk of industry policy change.