Incident: The company released its 2023 annual report, achieving operating income, net profit attributable to mother, and net profit excluding non-return to mother of RMB 10.67/2.53/249 million, respectively, +20.38%/42.07%/43.61% compared with the same period last year. Net operating cash flow of 199 million yuan, -46.58% YoY; EPS (basic) 0.77 yuan. The company plans to distribute a cash dividend of 5.00 yuan (tax included) to all shareholders for every 10 shares, and use the capital reserve fund to increase 4 shares for every 10 shares. The dividend payout ratio is 72%. The results are in line with market expectations.

Comment:

Strong growth in cough medicine has driven a significant increase in the company's profitability. Sales of Cough Remedies exceeded 1 billion tablets in 2023, up 91% year on year and 41% higher than in 2019. According to estimates, Cough Remedies accounted for about 43% of revenue in 2023, an increase of 16pp over the previous year, which significantly boosted the company's performance. 2023 gross sales margin +7.11pp to 56.15% yoy, net sales margin +3.62pp to 23.72% yoy. Among them, sales/management/R&D/finance expense ratios were +3.10/-0.44/-0.25/-1.96pp to 16.34%/6.21%/4.04%/0.45%, respectively.

In 2023, the company increased its brand building and marketing efforts, and sales expenses increased significantly. As the popularity of the special brand increases, we expect cough tablets and other special products to continue to grow.

The proprietary Chinese medicine business has performed well, and the nationwide expansion has achieved remarkable results. By industry, the revenue of the pharmaceutical industry/pharmaceutical commercial/chemical products and others was +27.54%/-81.02%/-6.26% year-on-year. The sharp decline in pharmaceutical commercial revenue was related to the termination of some agency businesses. By product, revenue from proprietary Chinese medicines/chemical pharmaceuticals/chemical raw materials was +44.06%/+2.05%/-8.08% year-on-year. The high increase in revenue from proprietary Chinese medicines was related to the amount of cough tablets released. Restrictions on the production capacity of chemical raw materials caused revenue fluctuations. In 2024, with the successive completion of fund-raising projects and the upgrading of environmental protection facilities, API production capacity is expected to increase. What is gratifying is that in 2023, the gross margin of proprietary medicines was +9.97pp to 74.54% year-on-year. Driven by the volume of cough medicine tablets, profitability increased dramatically. Looking at the subregions, with the exception of South China, the domestic market has achieved rapid revenue growth, and nationwide expansion has achieved remarkable results.

Cough relief tablets have a vast space to promote marketing organizational change and brand marketing construction around “laying the foundation and long-term benefits”.

Cough Remedies have remarkable curative effects and quick results. Clinically, they are used to treat chronic bronchitis, and have accurate curative effects on cough (especially cold cough and phlegm cough). According to the announcement, Cough Remedies are currently sold in prefecture-level cities and provincial capitals as regional agents. Some regions have low market coverage and broad market space. With the aging population, reform of marketing channels, and increased brand investment, it is expected to push the volume and price of Cough Remedies to rise sharply.

The company strives to achieve the goal of selling 2.4 billion cough tablets and a compound annual growth rate of close to 20% in about 3-5 years, and strives to reach a pharmacy coverage rate of about 40%.

Profit forecasting, valuation and rating: The company has an exclusive specialty product, cough medicine tablets. It has deep prescription and patent barriers, broad long-term development space, and is expected to achieve a sharp rise in volume and price. Expanding potential varieties and reforming marketing channels to start a second growth curve. Basically, the 24-25 net profit forecast was maintained at 285/361 million yuan, and the 26-year forecast was added to 446 million yuan. The current stock price corresponds to PE of 20/16/13 times, maintaining the “gain” rating.

Risk warning: the volume of core products falls short of expectations; marketing channel reform falls short of expectations; competition in the industry intensifies.