Event: Jumbo Island releases its 2023 three-quarter report. The first three quarters of 2023 achieved total operating income of 3.432 billion yuan (+3.49% year-on-year), net profit of 476 million yuan (+210.05% year-on-year), net profit of 496 million yuan (+106.55% year-on-year) after deducting non-return net profit of 196 million yuan (+106.55% year-on-year). In 2023, Q3 achieved total operating income of 845 million yuan (+0.9% yoy), net profit of 132 million yuan (+254% yoy), and net profit after deducting non-return net profit of 124 million yuan (+201.31% yoy). Net profit after deducting non-return to the mother increased significantly, mainly as follows:

1) The company actively promotes changes in the Chinese herbal medicine trade business and increases the volume of new products; 2) The company optimizes and integrates the product sales structure to improve profitability.

Profitability has increased dramatically, and the expense ratio has remained stable over the period. In 2023, the gross margin of the Q3 company was 50.16%, up 33.29pct year on year and 38.21pct over month. The increase in Q3 gross margin was mainly due to the company's active adjustment of the pharmaceutical industry product sales structure according to market demand. High margin products accounted for a relatively large share; net profit margin was 15.58%, up 7.02pct over the previous month. The sales expense ratio was 17.18%, a slight increase of 0.75 pct over the previous year, an increase of 1.63 pct over the previous month; the management expense ratio was 8.56%, a slight decrease of 0.77 pct from the previous year and a slight increase of 0.46 pct over the previous month; the R&D expense ratio was 2.73%, up 0.72 pct from the previous year and 1.78 pct over the previous month.

“Mainly traditional Chinese medicine, with equal emphasis on China and the West” to enhance the company's competitive strength. The company adheres to the product layout strategy of “mainly traditional Chinese medicine, equal emphasis on China and the West”, and constructs a new product pattern where traditional Chinese medicine, chemicals, and biopharmaceuticals go hand in hand, and comprehensively develop a new product pattern. At the same time, the company continues to pay attention to the secondary development of existing products, “689 technology” standard research, etc., to ensure uniform and stable product quality and accurate clinical efficacy, and further enhance the clinical value of products.

In addition, the competitiveness of the Chinese herbal medicine trade business has been further improved. Through “platform+entity” and “online+offline” integrated operation, the Chinese herbal medicine commodity trading center uses the “six unification” business model, and relies on the “N+50” provincial real estate production area resource coverage to achieve the layout of the entire Chinese herbal medicine industry chain. The Chinese herbal medicine trade revenue reached 1,775 billion yuan in the first three quarters, and the gross margin increased to 18.25%. With the layout of production areas and the expansion of the scale of strategic management reserves of Chinese herbal medicines, we are optimistic about the company's business development.

Profit forecast and investment rating: The company's net profit for 2023-2025 is estimated to be 616 million yuan, 781 million yuan and 955 million yuan respectively, with year-on-year growth rates of 232%, 26.9% and 22.2% respectively. The corresponding PE is 20X/16X/13X respectively, maintaining the “buy” rating.

Risk warning: New drug development falls short of expectations; drug collection risks; Chinese herbal medicine trade risks; sales fall short of expectations.