Innovation and transformation have begun to reap benefits, pipeline configurations continue to be abundant, and long-term growth momentum is strong? Revenue maintained positive growth, and profit margins continued to be optimized: the company achieved revenue of 4.610 billion yuan (+3.6% year-on-year) in 2023H1; if all were based on drug sales revenue, revenue for the period was 5,537 billion yuan (+7.1%). With the deepening of innovation and transformation, the company's gross margin was further optimized and rose to 78.2% (+0.9pp). Sales expenses were 1,340 billion yuan (+4.8%), and sales expenses were 29.1% (+0.4pp). The administrative expenses were 318 million yuan (+13.7%), and the administrative cost rate was 6.9% (+0.6pp), mainly due to the increase in labor costs and maintenance costs required for new business development. R&D expenditure increased markedly, reaching 239 million yuan (+89.6%), accounting for a revenue ratio of 5.2% (+2.4pp). Among them, capital expenditure increased by 161% to 163 million yuan to purchase equity investment in R&D companies, purchase rights expenses for innovative products, and clinical trials of innovative products. The reporting period recorded a net profit of 1,916 billion yuan (+6.7%) and a net profit margin of 41.6% (+1.2pp). At the end of the period, the company's balance ratio was 7%, down 3pp from the beginning of the period. Cash on account is 4.451 billion yuan, operating cash flow is 1,491 billion yuan, and the financial situation is healthy.

The impact of collection is gradually being digested, and product launch and pipeline expansion provide growth impetus: Due to the influence of Dailixin from collection, the company's cardiovascular sector and digestive sector's revenue growth rate slowed during the period according to drug sales revenue standards. 2023H1 recorded revenue of 3,096 billion yuan (+5.9%) and 1,780 billion yuan (+4.2%), respectively. As innovative products continue to be added and commercialized, it is expected to provide lasting impetus for the resumption of growth. Diazepam nasal spray was successfully marketed, filling the gap in emergency medication for patients with acute recurrent epilepsy in China. Furthermore, the company successfully obtained an interest in Y-3 injection, a new class 1 anti-ischemic stroke brain cell protector, and further expanded the long-term pipeline layout in the cardiovascular and cerebrovascular sector. Digestive sector products have also been enriched. Sidinib (cinipride tartrate tablets), as a fourth-generation gastroenteric stimulant, still accounts for a low share of the Chinese market. After it joined the Kangzhe product line, there is plenty of room for market development and is expected to provide a certain increase in sales.

The medical and aesthetic ophthalmology sector maintained rapid growth, and innovative products entered a harvest period: the company's dermatology and aesthetic sector and ophthalmology sector continued to maintain rapid growth, with 2023H1 revenue reaching 245 million yuan (+27.4%) and 246 million yuan (+29.6%), respectively. A number of innovative products have entered the marketing stage. The approval and marketing of Yilutsu (tirekizumab) and Metaitron (prefilled methotrexate subcutaneous injection) provides patients with psoriasis with different treatment options and satisfies the multi-level treatment needs from routine patients to refractory patients. Alucotinib cream was first prescribed in August in Lecheng, Hainan. Through the accumulation of real-world clinical evidence, it will also help promote its official listing in China.

The target price is HK$18.66, purchase rating: We fully consider the impact of the collection of Delixin, Boidine, and Yousif, conservatively consider the value of innovative pipelines and skin care products, and do not consider the Southeast Asian business contribution yet. According to the PE valuation method, the target price is HK$18.66, which has room for 40.5% increase from the current price, corresponding to a price-earnings ratio of 12 times in 2024, maintaining the buying rating.