Event: The company released its report for the third quarter of 2023. 2023Q1-3 achieved revenue of 543 million yuan, an increase of 6.89% over the previous year; realized net profit of 139 million yuan, an increase of 7.09% over the previous year; and achieved net profit of 118 million yuan, an increase of 7.07% over the previous year. Among them, 2023Q3 achieved revenue of 171 million yuan, an increase of 8.24% over the previous year; realized net profit of 49 million yuan, an increase of 2.09% over the previous year; and realized net profit after deducting 41 million yuan from the parent, a year-on-year decrease of 7.94%.

Ganoderma lucidum spore powder products grew steadily, and the performance of the provincial and Internet markets was positive. By product category, the revenue of Ganoderma lucidum spore powder products in Q1-3 for 2023 was 370 million yuan, up 7.29% year on year; the revenue of dendrobium officinale products was 88 million yuan, down 0.49% year on year; and revenue from other products was 74 million yuan, up 10.17% year on year. By sales region, in Q1-3 of 2023, revenue in Zhejiang was 348 million yuan, up 5.04% year on year; revenue outside the province was 59 million yuan, down 11.79% year on year; and Internet revenue was 125 million yuan, up 22.21% year on year.

Gross margin declined, while cost control was relatively good, and Q3 performance was slightly under pressure. The gross margin of 2023Q1-3 company was 82.59%, down 2.36pct year on year; sales expense rate/management expense rate/R&D expense ratio were 42.51%/12.54%/7.34% respectively, with year-on-year changes of -4.07pct/1.24pct/-0.13pct respectively. The overall improvement in the cost ratio was significant. Among them, the gross margin of 2023Q3 company was 83.78%, down 1.08pct year on year; sales expense rate/management expense rate/R&D expense ratio were 38.33%/15.08%/7.76% respectively, with year-on-year changes of -2.15pct/1.39pct/0.8 pct; net profit margin was 28.70%, down 1.63 pct year on year.

The product matrix is rich, and the brand power continues to be strengthened. The company's Ganoderma lucidum spore powder products have advantages in breeding, cultivation, and wall removal processes. They include different dosage forms of powders, granules and tablets, and can meet different sales channels and consumer needs such as online and offline, health gifts, etc. Among them, Ganoderma lucidum spore powder tablet products are the main products for developing markets outside of the province. Through process innovation, further optimization is made in terms of consumer carrying and drinking, which is conducive to expanding usage scenarios and target consumer groups, and enhancing the company's brand influence through the agent model.

Investment suggestions: The development of the traditional Chinese medicine and health products industry is expected to maintain a relatively stable growth rate in the future. The company has a core competitive advantage in the industry, a high level of product gross margin, and has accumulated a number of stable customer base with high brand loyalty. The layout of a national market system focusing on Ganoderma lucidum spore powder tablet products, along with marketing reforms and brand image building, is expected to bring about new growth points. The company's 2023-2025 EPS is expected to be 1.57, 1.95, and 2.32 yuan, and the corresponding PE is 26, 21, and 18X respectively, maintaining the “buy” rating.

Risk warning: changes in health-care industry regulatory policies; increased industry competition; market expansion outside the province falls short of expectations; channel price control risks; profit level fluctuations; food safety risks.