Recommended logic: 1) Build a moat for the gastrointestinal category. It is estimated that in 2024, the scale of the pharmaceutical industry for gastrointestinal diseases in China is expected to reach 63.32 billion yuan, and the penetration rate of the core product, digestive tablets, will further increase. 2) Implementation of equity incentives. Performance targets were assessed for the three fiscal years 2024-2026. The net profit growth rate due to mother was based on a compound growth rate of not less than 9% in 2022, which was 708/7.72/841 million yuan, respectively. 3) The company's cash flow is healthy and stable, and the valuation of “high dividends+central state-owned enterprises” has been reshaped.

Build a moat for gastrointestinal categories and consolidate the dominant category matrix for regular medicines at home. The company continues to build the four categories of “spleen, stomach, intestines, cough, asthma, and supplements”. Focusing on the business focus of “strengthening OTC, developing health, and laying out prescription drugs,” the company deepens the two-wheel drive development path of “endogenous growth and epitaxial mergers and acquisitions”, and the strategic positioning of “practitioners of regular medicines at home” has become increasingly clear. In terms of category layout, the spleen and stomach category continues to build a moat, focusing on the core single product, stomach health tablets, cultivating healthy oral liquid, spleen strengthening granules, and supplementing gastric disease treatment varieties such as rabeprazole sodium, and expanding from a large single product to a spleen and stomach category cluster. In 2023, the revenue scale of stomach health tablets returned to 1.1 billion, and the revenue scale of the two major products, lactobacillus trifecta active bacteria enteric capsules (Beifida), both exceeded 500 million yuan. With the development of multiple channels, the potential of the “Jiangzhong” and “Lihuo” brands continues to grow, which is expected to catalyze the expansion of other categories.

Equity incentives have been implemented, demonstrating the company's confidence in development. On January 3, 2024, Jiangzhong Pharmaceutical announced the second restricted stock incentive plan (draft). The plan is to grant no more than 7.635 million shares, accounting for 1.21% of the total share capital; of these, 6.902 million shares were awarded for the first time, no more than 213 people were eligible for the first time, and the grant price was 12.79 yuan/share. The assessment year for this incentive plan is the three fiscal years 2024-2026. The assessment and sales restrictions are lifted on an annual basis. The net profit growth rate to the mother is based on a compound growth rate of not less than 9% in 2022, which is 708/7.72/841 million yuan respectively; the return on invested capital is not less than 13.6%; and the R&D investment intensity is not less than 3.9%/3.91%/3.92%, respectively.

The “high dividend+central state-owned enterprise” valuation was reshaped, and the company maintained a high percentage of dividends in 2023. On January 24, the State Council's State-owned Assets Administration Commission will further study the inclusion of market value management in the performance assessment of central enterprise heads. Guide central enterprise leaders to pay more attention and pay more attention to the market performance of listed companies they control, promptly use market-based methods such as increasing holdings and repurchases to convey confidence, stabilize expectations, and increase cash dividends to better return investors. The company's 2023 profit distribution plan distributes a cash dividend of 7 yuan (tax included) for every 10 shares, accounting for 62.2% of net profit due to mother in 2023. In addition, the company completed profit distribution for the first three quarters of 2023 in November 2023. The company's total cash dividend for 2023 totaled 818 million yuan, accounting for 115.52% of net profit due to mother in 2023.

Profit forecast and investment advice: The company's net profit due to mother is expected to be RMB 8.1/9.2/1.06 billion in 2024-2026, an increase of 13.8%/14.8%/15.1% year-on-year. First coverage, active attention is recommended.

Risk warning: risk of policy fluctuations; risk of sales of core products falling short of expectations; risk of channel development falling short of expectations; risk of fluctuations in raw material prices.