Incident: Yiling Pharmaceutical announced its report for the third quarter of 2023. The company's operating income for the first three quarters of 2023 was 8.575 billion yuan (YOY +7.91%), net profit of 1,759 billion yuan (YOY +24.35%), and net profit of 1,640 billion yuan (YOY +15.84%) after deducting non-return net profit of 1,640 billion yuan (YOY +15.84%).
Q3 The company's revenue and net profit declined year on year, and short-term performance was under pressure. 2023Q3 had operating income of 1,784 billion yuan (YOY -25.02%), net profit of 153 million yuan (YOY -58.26%), net profit of net income of 150 million yuan (YOY -58.26%) after deducting net profit of 99 million yuan (YOY -72.80%). 2023Q3 performance declined due to the 2022Q3 base and the slowdown in demand for the 2023Q3 terminal Lianhua series. Affected by rising prices of Chinese herbal medicines, the gross profit margin of Q3 sales was 58.26%, a year-on-year decrease of nearly 3.3 pct.
Operating cash flow has declined relatively, and the three-fee ratio has risen slightly. The net cash flow from the company's operating activities in the first three quarters of 2023 was 145 million yuan (YOY -88.18%), mainly due to increased operating expenses. On a quarterly basis, net cash flow from 2023Q1 operating activities was $400 million (YOY -26.61%), Q2 was $280 million (YOY -68.44%), and Q3 was -536 million yuan (YOY -155.88%).
The sales expense ratio of 2023Q3 was 31.69%, up nearly 3.9pct year on year; management expense ratio was 7.59%, up nearly 3.1 pct year on year; and financial expense ratio was 0.26%, up 0.1 pct year on year.
Investment in research and development continues to increase, and new progress has been made in the research and development of traditional Chinese medicines and chemicals. 2023Q3 R&D expenses were 191 million yuan (YOY +7.58%), and the R&D cost rate reached 10.71%. The company has actively carried out innovative research and development of traditional Chinese medicines, laid out chemical pharmaceuticals and health industries, and constructed a medical and health industry pattern where patented traditional Chinese medicine, chemical biotechnology, and health industries develop collaboratively and promote each other. 2023Q3 clinical trial applications for the new traditional Chinese medicine Lianhua Cough Granules were accepted, clinical trial applications for innovative Chinese medicine Ginseng and Rong granules were approved, and clinical trial applications for innovative chemicals G201-Na capsule drugs and XY0206 drugs were accepted.
Investment suggestions: Under the guidance of complex pathology theory, the company focuses on traditional Chinese medicine, chemical and biotechnology, big health and other business sectors, is market-oriented, further enhances drug innovation capabilities, and enriches the product pipeline. We expect net profit from 2023-2025 to 20/ 24/28 billion, respectively, and PE 18/16/13 times, respectively, to maintain the “recommended” rating.
Risk warning: uncertainty in R&D progress; policy risk; risk of product sales falling short of expectations; uncertainty in drug registration progress.