Revenue for the first three quarters was +4.05% yoy, and net profit was +8.52% yoy. In the first three quarters of 2023, the company achieved a total operating income of 735 million yuan, an increase of 4.05%; net profit of 95 million yuan, an increase of 8.52% over the previous year; net profit after deduction of 90 million yuan, an increase of 8.05% over the previous year; and basic earnings per share of 0.16 yuan, an increase of 8.52% over the previous year. In the Q3 quarter of 2023, the company achieved revenue of 214 million yuan, a year-on-year decrease of 6.84%; realized net profit of 30 million yuan, an increase of 1.50% over the previous year; realized net profit after deduction of 27 million yuan, a year-on-year decrease of 1.99%; and basic earnings per share of 0.05 yuan, an increase of 1.59% year-on-year.

Profitability continued to improve, and net interest rates increased by 0.78pct in the first three quarters. The company's gross margin for the first three quarters of 2023 was 26.76%, a year-on-year increase of 0.98 pct. On the cost side, the company's expenses rate for the first three quarters was 9.57%, a year-on-year decrease of 0.34pct; among them, the sales expense rate/management expense rate/R&D expense rate/financial expense ratio were 1.88%/5.05%/-0.05%, respectively -0.01pct/-0.26pct/+0.27pct/-0.34pct; the financial expenses were -361,000 yuan, -117.85% year-on-year. The main reason was the capitalization of interest expenses on special funds raised by the company issued convertible bonds. The company achieved a net profit margin of 13.87% in the first three quarters, an increase of 0.78pct over the previous year.

It focuses on developing the gelatin market and has industry-leading ability to integrate and extend the industrial chain. The company is an industry-leading manufacturer of gelatin and hollow capsules. It has more than 60 years of gelatin production history and more than 30 years of hollow capsule production history. The production capacity scale, product quality, innovation ability, and customer reputation are at the forefront of the industry. In the future, with the rapid development of downstream medical, pharmaceutical, and aesthetic markets, the second gelatin market of the company's pharmacopoeia will also usher in more development opportunities. In particular, with the company's subsequent gradual development of ultra-low endotoxin gelatin, the regenerative medicine materials market will be a key application area that the company will focus on developing in the future, and the company will make every effort to build a leading enterprise in the vertical integration of the health industry from gelatin to capsules and gelatin to collagen in the industry.

Issue convertible bonds to promote the expansion and upgrading of the industrial chain. In August 2023, the company issued and listed convertible corporate bonds, and issued 4.55 million convertible corporate bonds to unspecified targets, each with a face value of RMB 100 million, and a total capital raised of RMB 455 million. After deducting the total expenses related to this issuance of about $12 million (excluding tax), the actual net capital raised was about 442 million yuan. The capital raised this time will be invested in the new hollow capsule intelligent industrialization expansion project and supplementary working capital.

Investment suggestions: The company focuses on the entire natural collagen industry chain, and has formed a high-quality bone base - gelatin - collagen - nutritional health products/medicinal materials production, R&D and sales service system, and has formed a good technical reserve, brand effect and customer reputation. In recent years, the company has further accelerated the pace of strategy implementation, continuously improved management efficiency, actively stepped up technological innovation, and developed extended products around gelatin, collagen, and hollow capsules, and has a layout in the fields of “medicine, health, food, and beauty”. With the rapid development of the collagen industry and the continuous increase in public health awareness, the company's revenue is expected to continue to grow. We forecast that the company's 2023-2025 EPS will be 0.20 yuan, 0.23 yuan, and 0.26 respectively, and the corresponding PE will be 31.7X, 27.8X, and 24.6X respectively, maintaining the “increased holdings” investment rating.

Risk warning: The expansion of the scale of operations may bring management risks, increased market competition risks, the risk of fluctuations in raw material prices, the risk of mismatch between investment and return in the retail product market expansion process, policy risks, and the risk that fund-raising investment projects do not meet expectations.