Incident: The company released its 2023 annual report, achieving operating income of 9.655 billion yuan (+7.32%), net profit to mother of 2,823 billion yuan (+30.04%), and net profit of non-return to mother of 2,692 billion yuan (+32.72%). On a quarterly basis, Q4 achieved operating income of 3.118 billion yuan (+0.49%), net profit of 879 million yuan (+51.84%), net profit after deducting non-return to mother of 864 million yuan (+48.48%), and a decrease of 170 million yuan in R&D in a single quarter, mainly due to 22Q4 BD's down payment fees for Hengyi Biotech's products, which had a high impact on the base; sales expenses decreased by 170 million yuan. We believe that this was mainly due to a decrease in expenses related to academic activities and an increase in OTC share after regulatory compliance; financial expenses decreased by 6000 million yuan Ten thousand yuan, mainly due to an increase in interest income.

Comment:

By treatment sector, the segments that performed well in 2023 were: clean-up and detoxification products with revenue of 3.380 million yuan (17.68%), pediatric products with revenue of 2,741 billion yuan (+13.01%), respiratory products (revenue of 640 million yuan (+9.74%), and core products, Pudilan anti-inflammatory oral liquid, children's tempuration tablets, and rabeprazole sodium enteric capsules, which accounted for 73.33% of total sales revenue. We expect that the impact of Pu Dilan's withdrawal from provincial health insurance will be clear, and the share of OTC channels will continue to increase; children's tempezole will be sold rapidly; and rabeprazole won the bid for the 9th national collection, but we expect the company to make up for the impact on the profit side by developing retail channels and increasing the promotion of the other three digestive tract varieties (such as oral liquid for stomach health).

The company enriches the product pipeline through self-research and external introduction to enhance long-term competitiveness. The company's Pharmaceutical Research Institute is based on traditional Chinese medicine, generic pharmaceuticals, and the balanced layout of new drugs to accelerate the promotion of innovative drugs. In 2023, it obtained drug registration certificates for concentrated sodium valproate injection solution, azithromycin dry suspension, pregabalin oral solution, atomoxetine hydrochloride oral solution, esprolol hydrochloride injection, ibuprofen suspension, and children's tempurine hot syrup. The consistency evaluation approval for lidocaine hydrochloride injections was obtained. On the BD side, in 2023, the company reached 4 product introduction or cooperation agreements, including 1 polymerase acid protein (PA) inhibitor ZX7101A for treating or preventing influenza, 1 TCM targeted dialysis therapy device, and 2 medical device products for gynecology and ophthalmology, respectively.

Profit forecast: We estimate that the company's net profit for 2024-2026 will be RMB 3,016 billion, RMB 3.407 billion and RMB 3.796 billion respectively, corresponding to EPS of RMB 3.27, RMB 3.70, and RMB 4.12, respectively. The company's Pu Di Lan Anti-Inflammatory Oral Solution is gradually being affected by medical insurance. Second-tier varieties are growing rapidly. In the future, it will continue to maintain sales and channel advantages based on a rich product pipeline, while driving the performance growth of potential varieties in medical institutions and OTC pharmacies. Referring to comparable companies, we gave the company 13-16 XPE in 2024, with a corresponding reasonable value range of 42.54-52.36 yuan, continuing to maintain a “superior to the market” rating.

Risk warning: Risk of policies such as health insurance negotiations and centralized procurement, risk of R&D falling short of expectations, risk of falling short of expectations, risk of marketing falling short of expectations.