Event: The company released its 2023 three-quarter report: 23Q1-3 achieved revenue of 8.575 billion yuan, an increase of 7.91% over the previous year, net profit of 1,759 billion yuan, an increase of 24.35% over the previous year, and net profit of 1,640 billion yuan after deducting non-net profit of 1,640 billion yuan, an increase of 15.84% over the previous year.

Q3 Performance was under pressure in the short term, and the profit side declined significantly under a high base: 23Q1-3 achieved revenue of 8.575 billion yuan, an increase of 7.91% over the previous year, net profit of 1,759 billion yuan, an increase of 24.35% over the previous year, and non-net profit of 1,640 billion yuan, an increase of 15.84% over the previous year. Looking at Q3 alone, the company achieved operating income of 1,784 million yuan, a year-on-year decrease of 25.02%, net profit of 153 million yuan, a year-on-year decrease of 58.26%, and net profit of 99 million yuan after deducting non-net profit, a year-on-year decrease of 72.80%. The high base of 22Q3 compounded short-term fluctuations in the company's operations, putting pressure on the company's performance in the short term.

The expense ratio increased slightly year over year, and operating cash flow declined: on the cost side, the sales expense ratio for the Q3 quarter was 31.69% (+2.6 pct), the management expense ratio was 7.59% (year over +2.4 pct), the R&D expenses rate was 10.71% (year over year +3.2 pct), and the financial expenses ratio was 0.26% (+0.4 pct year over year), and the overall cost side increased slightly. The net cash flow from 23Q1-3's operating activities was 145 million yuan, a year-on-year decrease of 88.18%, mainly due to increased operating expenses.

The formula granule business is growing rapidly, and it is expected that the company's performance will continue to increase: the company will continue to lay out the formula granule business and accelerate the R&D filing of new standard formula granules (national standard/provincial standard). As of 23H1, the company has completed the filing of 246 national standard Chinese medicine formula granule varieties and 275 traditional Chinese medicine formula granule varieties in Hebei Province. 23Q1-3's formula granule business revenue increased by more than 40% year over year. On October 27, for the first time in the country, the Chinese Medicine Formula Granule Provincial Alliance announced the results of the proposed selection. The company applied for 199 varieties to participate in the collection and won the bid for all of them, providing more support and guarantee for the company to expand the formula granule business market.

There are plenty of varieties under development, and innovative traditional Chinese medicine drugs are gradually entering the harvest period: the company's new traditional Chinese medicine for diabetic retinopathy, Tongluo Mingmu capsules, was approved for sale on October 24, 23, and the product matrix continues to be rich. As of October 27, the company has 9 innovative Chinese medicines in the clinical stage. Among them, four varieties of chaihuangli gall capsules to treat rheumatoid arthritis and chronic cholecystitis, Yuping Tip for treating allergic rhinitis, and Lianhua Qinggan granules for children with colds in children are in phase III clinical phase. The Chai Qintong Lymphatic Tablet Program for treating rheumatoid arthritis is preparing phase II clinical trials to treat gastroenteric colds, and ginseng granules for amyotrophic lateral sclerosis, and Lianhua Qingqi granules for treating pediatric bronchitis have been approved for clinical development for the company for a long time. Provide strong guarantees.

Profit forecast and investment advice: The company's revenue for 2023-2025 is expected to be 108.3/127.8/15.10 billion yuan, respectively, and net profit of 19.5/23.2/2.78 billion yuan respectively, maintaining the “buy” rating.

Risk warning: risk of price reduction in medical insurance or collection; risk of price increases for upstream raw materials; risk of R&D falling short of expectations or failure.