Core views

On the evening of April 12, the company released its report for the first quarter of 2024, achieving operating income of 1,359 million yuan, an increase of 0.48% over the previous year; realized net profit of 148 million yuan, an increase of 4.67% over the previous year, and realized net profit of 140 million yuan without return to mother, an increase of 0.20% over the previous year; the performance was in line with our previous expectations. By sector, the injectables sector has been under pressure for a short period of time under high base, while the non-injectables sector has gradually recovered. Looking ahead to 24 years, the company's marketing reforms will continue to deepen, focusing on the development of core products and non-injectable varieties, and optimistic that innovation and academic leadership will continue to empower the company's sales development.

occurrences

Company releases report for the first quarter of 2024

On the evening of April 12, the company released its report for the first quarter of 2024, achieving operating income of 1,359 million yuan, an increase of 0.48% year on year; realized net profit of 148 million yuan, up 4.67% year on year; net profit without return to mother was 140 million yuan, an increase of 0.20% year on year; the performance was in line with our previous expectations.

Brief review

Excellent report quality, oral formulation recovery

In Q1 2024, the company achieved operating income of 1,359 million yuan, a year-on-year increase of 0.48%; achieved net profit of 148 million yuan, a year-on-year increase of 4.67%, after deducting non-net profit of 140 million yuan, an increase of 0.20% over the same period last year; both revenue and profit remained stable on a high basis. Among them, the injectables sector was under short-term pressure at a high base, and the non-injectable sector gradually picked up.

Injections: Short-term pressure under high base. Optimistic for the full year's healthy development in Q1 2024. The company's injections sector achieved operating income of 538 million yuan, a year-on-year decrease of 8.87%. Under short-term pressure against the backdrop of a high base for the same period last year, gross margin fell 2.09 percentage points to 71.60% year on year, and profitability fluctuated in the short term. By product: 1) Ginkgo biloba diterpene lactone glucamine injection:

Q1 is expected to be under pressure in the short term in the context of external industry compliance upgrades, but as the company continues to develop existing hospitals and carry out academic promotion activities, superimposed ginkgo diterpene is officially included in routine medical insurance catalogue management, and it is expected that ginkgo diterpene will gradually return to a healthy development trend in '24. 2) Dextroxine injection: The growth rate of Q1 is expected to slow in the same period last year, but with the official lifting of “severe” payment restrictions, the clinical value of metaconil in respiratory infectious diseases has been further recognized, and sales are expected to grow healthily in 24 years.

Non-injectables: Jin Zhen achieved a gradual recovery. It is optimistic that the company's non-injectable products will gradually recover in Q1 in 2024. The company's non-injectable products will achieve operating income of 813 million yuan, an increase of 7.50% year over year, which is mainly expected to be driven by the faster growth rate of oral liquid products; by sector: 1) Oral liquid products: achieved operating income of 370 million yuan, an increase of 30.24% year on year. The core product is expected to recover well in the context of strong terminal demand; gross margin decreased by 1.05 percentage points year on year to 80.92%, and profitability remained basically stable; we believe As the company focuses on the development and growth of core high-end hospitals and the gradual restoration of industry order, it is expected that oral liquid products will continue to recover, driven by core products. 2) Granules and infusion products: Achieved operating revenue of 105 million yuan, a year-on-year decrease of 15.40%, and the overall growth rate is slowing down, but the core product, apricot shell cough tablets, are expected to maintain steady growth; gross margin fell 2.78 percentage points to 78.08% year on year, and profitability fluctuated in the short term; as the company actively promotes channel construction, continues to optimize grass-roots terminal resources and lay out development-level varieties, it is expected that Apricot cough tablets will continue to be released for 24 years. In addition, the company's capsules, tablets, patches and gels achieved revenue of 197 million yuan, 82 million yuan, 51 million yuan, and 0.09 billion yuan respectively, with year-on-year increases of -4.88%, 1.84%, -13.10%, and 260.97%, respectively.

Looking ahead to 2024: Marketing reforms continue to be deepened, focusing on core varieties and non-injectable varieties. Since 23 years of development, the company has focused on improving marketing quality, actively strengthening academic promotion, adhering to academic leadership, academic promotion, and empowering sales development. In addition, the company has carried out innovative reforms in marketing behavior supervision, and also requires action plans to be “standardized,” “required,” and “assessed” to ensure that core varieties and development-level varieties “have someone to do it”. The assessment indicators are implemented to individuals to continuously promote the deepening of marketing reforms. Looking ahead to 2024, the company's self-operated team will continue to focus on product assessment, gather the company's superior resources, train excellent marketers, improve seasonal sales imbalance and imbalance in the development of injectable and oral varieties; and while strengthening self-management team building, insist on growing more and more business formats, and work together to develop comprehensive investment promotion, OTC, and distribution business formats to jointly promote the company's sales growth.

In terms of segments and varieties, in 24 years, the company continued to focus on the five core products of heat poison injection, ginkgo diterpene lactone glucamine injection, Jin Zhen oral solution, Tianshu capsules/tablets, and apricot shell cough relief granules. In the injectables sector, it performed brilliantly in '23, driven by rapid growth. As the company's marketing reforms continued to deepen, building a strong foundation for the steady growth of the company's sales scale, lifting restrictions on the Heavenging medical insurance catalogue and incorporating ginkgo diterpene into the regular catalogue, the injectables sector is expected to achieve steady growth in 24 years; in the non-injectable sector, although it was under pressure due to sales adjustments and the influence of the industry policy environment in '23, the company's marketing reforms continued to deepen, strengthen academic promotion capacity building, and implement dedicated personnel for non-injectable varieties while actively developing at the same time varieties, Building a non-injectable product group echelon, the company's non-injectable sector is expected to gradually recover in 24, driven by restorative growth in core varieties.

Continue to increase investment in R&D and maintain healthy business quality

In Q1 2024, the company's comprehensive gross margin was 74.61%, down 0.39 percentage points year on year, and profitability remained stable. The sales expense ratio was 37.44%, a year-on-year decrease of 6.52 percentage points, mainly due to changes in caliber due to personnel structure adjustments; the management expense ratio was 8.57%, an increase of 4.51 percentage points over the previous year, mainly due to the company increasing its investment in talent and management related activities on the basis of personnel structure adjustments; and the R&D expense ratio was 15.02%, an increase of 1.08 percentage points over the previous year, mainly due to the company's increase in R&D investment. The net cash flow from operating activities was $199 million, mainly due to higher cash repayments in the current period. Investment income increased by 1246.80% year-on-year, mainly benefiting from the company's investment and financial management generating more income in the current period. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We expect the company to achieve operating income of 5.773 billion yuan, 6.712 billion yuan and 7.812 billion yuan respectively in 2024-2026, up 18.6%, 16.3% and 16.4% year-on-year, with net profit attributable to mother being 646 million yuan, 776 million yuan and 934 million yuan respectively, up 20.3%, 20.2% and 20.4% year-on-year respectively, equivalent to EPS of 1.10 yuan/share, 1.33 yuan/share and 1.60 yuan/share, corresponding PE 19.2x, 16.0x and 13.3x, maintaining a “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment has increased. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profit; 2) the risk of collection and price reduction, the company's core products may further enter the collection list, reduce product prices and reduce product profits, which in turn affects the company's profit expectations; 3) Risk of price increases in raw materials and power costs: the increase in the price of the company's raw materials will cause cost pressure to rise, which in turn affects the company's profit performance; 4) Hospital diagnosis and treatment volume will fall short of expectations: after the epidemic, home diagnosis and treatment volume may be affected. This affects sales of prescription drugs, which in turn affects the company's overall profit; 5) Risks related to supervision: On May 15, 2023, the company announced that it recently received a warning letter from the Jiangsu Regulatory Bureau of the Securities Regulatory Commission. In 2019, the company signed a contract for research and development of traditional Chinese medicine formula granules. After paying 10.5 million yuan in R&D expenses, the advance payment should be included in the end of the year according to the contract progress, but the company confirmed the full amount of R&D expenses according to the payment amount. The R&D expenses accounted for 1.82% of the company's total profit in the 2019 consolidated statements. The contract has now been terminated, and the company has completed corresponding account processing in 2022. There are no retroactive adjustments involved, and there will be no impact on future performance.