Matters:

The company released its three-quarter report for 2023. The company's revenue was 8.575 billion yuan (+7.91%), and net profit was 1,759 billion yuan (+24.35%). In the third quarter alone, the company's revenue was 1,784 million yuan (-25.02%), and net profit was 153 million yuan (-58.26%).

Commentary:

Results for the third quarter are under pressure and are expected to be affected by the decline in revenue from respiratory products. Respiratory products showed concentrated explosive growth in the first quarter this year. The epidemic stabilized in the second quarter, and product sales resumed normalization. Respiratory products are expected to return to normal levels next year after experiencing fluctuations. The company continues to promote the expansion of application scenarios and spaces for Lianhua Qingfeng. The testing of the product to treat influenza in children has been completed, and the influenza prevention test plan will be launched within the year. In addition to Lianhua Qingfeng, Lianhua Qingfeng cough tablets are selling well, and are expected to become a major variety exceeding 1 billion dollars in the future.

Overall, respiratory products are expected to maintain steady growth in the next few years.

The company's R&D is progressing steadily. During the reporting period, the company invested 594 million yuan in R&D, accounting for 6.92% of revenue (-0.02pct). It has remained stable and is at the leading level in the same industry. Currently, the company has 9 innovative Chinese medicines in the clinical stage. Recently, the new drug declared by the Tongliao Mingmu capsule for the treatment of diabetic retinopathy has been approved. The product is an innovative traditional Chinese medicine developed by the company based on clinical experience under the guidance of traditional Chinese medicine, the pathologic theory of traditional Chinese medicine. The company conducted a randomized, double-blind, double-simulation, multi-center clinical trial of the drug with parallel control of calcium hydroxybenzenesulfonate capsules. Clinical trial results showed that after 12 weeks of treatment, the spotty hemorrhage test group with moderate nonproliferative diabetic retinopathy was superior to the control group. The number of diabetics in our country is huge. As the course of the disease of diabetics lengthens, the prevalence of sugar networks is gradually rising, and the incidence rate is very high.

At the same time, the company already has Jinlida granules for type 2 diabetes. It is expected that the new product will form strong collaboration with departments, and the future market space will be broad.

Investment advice: Be optimistic about the company's performance and maintain a “recommended” rating. Considering that the sales volume of the company's respiratory products fell short of expectations, we adjusted the company's net profit for 23-25 to 21.3/17.1/1.97 billion yuan (the original forecast value of net profit for 23-25 was 25.8/29.6/3.37 billion yuan), with a year-on-year growth rate of -10%/-19.5%/+15.1%. In order to more clearly reflect the growth potential of the company's various businesses, segmented valuations are used. 1) The competitive pattern of Lianhua Qingfeng is quite stable, and the trend of increasing brand concentration is clear. Using the DCF valuation, corresponding to a 23-year market value of 17 billion yuan; 2) For the non-Lianhua Qingfeng segment, its performance growth rate is expected to remain at 20% in the next 5 years. The reference is comparable companies that have given 20 times PE in 23 years, corresponding to a market value of 23.1 billion yuan; 3) For innovative traditional Chinese medicine currently being developed in phase 3, the peak sales multiplier method is used for valuation (3 times PS), with a market value of 10.5 billion yuan. It is estimated that the total market value of the company is 50.6 billion yuan, corresponding to the target price of 30.3 yuan, maintaining the “recommended” rating.

Risk warning: The pace of approval of new drugs and the collection of large varieties fell short of expectations.