Key elements of the report:

On April 13, 2024, the company released its 2024 quarterly report. With 2024Q1, the company achieved operating income of 1,359 million yuan (+0.48%), net profit attributable to mother of 148 million yuan (+4.67%), and net profit of non-return to mother of 140 million yuan (+0.20%).

Investment highlights:

High growth in oral liquids and gels

With 2024Q1, the company's revenue of various dosage forms was 190 million yuan (+260.97%) for gels, 370 million yuan (+30.24%) for oral liquid, 82 million yuan (+1.84%) for tablets, 197 million yuan (-4.88%) for capsules, 538 million yuan (-8.87%) for injections, 51 million yuan (-13.10%) for patches, and 105 million yuan (-15.40%) for granules and infusions, respectively. Oral liquids are mainly driven by the year-on-year increase in sales of Jin Zhen oral liquid, while gels are mainly driven by year-on-year growth in sales of musculoskeletal pain relief gels.

The gross margin of tablets and capsules increased year on year. The remaining dosage forms all decreased to varying degrees in 2024Q1, and the company's overall gross margin was 74.61% (down 0.49 percentage points year over year). The dosage forms look at gross profit margin, 86.05% for gel (decrease of 0.34 percentage points), oral solution 80.92% (decrease of 1.05 percentage points), tablets 74.42% (increase of 3.78 percentage points), capsules 69.51% (increase of 2.86 percentage points), injection 71.60% (decrease of 2.09 percentage points), patch 78.91% (decrease of 4.60 percentage points), granules and injections 78.08% (decrease of 2.78 percentage points).

Increased R&D investment and cost rate optimization

2024Q1, the company's sales expense ratio of 37.44% (year-on-year decrease of 6.52 percentage points), management expense ratio of 8.57% (year-on-year increase of 4.51 percentage points), financial expenses ratio -0.67% (year-on-year decrease of 0.43 percentage points), and the total three expense rates are 45.34% (2.44 percentage points year-on-year decrease), indicating the optimization of the company's expense ratio. R&D expenses are 204 million yuan (+ 8.24%), R&D expenditure ratio is 15.02% (increase of 1.08 percentage points over the previous year), and R&D investment continues to grow.

Profit forecast and investment suggestions: The company is a leading Chinese medicine innovator with abundant product reserves. According to fundamental research such as the disclosure of the latest annual report, the profit forecast is estimated to be 5.720 billion yuan/6.747 billion yuan/7.934 billion yuan respectively (5.584 billion yuan/6.507 billion yuan/7.655 billion yuan before adjustment); corresponding net profit to mother is 646 million yuan/775 million yuan/939 million yuan (before adjustment: 653 million yuan/800 million yuan/800 million yuan/ $10.03 billion). Corresponding to EPS 1.10 yuan/share, 1.33 yuan/share, 1.61 yuan/share, corresponding PE is 16.90/14.07/11.62 (corresponding to the closing price of 18.66 yuan on April 18, 2024). Based on the fact that the company is a leader in innovative traditional Chinese medicine, has long-term growth potential, and maintains a “buy” rating.

Risk factors: risk of policy change, risk of product quality control, risk of R&D not meeting expectations, risk of drug market entry