Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 1.94 billion yuan (+7.6%); realized net profit attributable to mother of 380 million yuan (+40.3%); net profit after deducting non-return to mother of 370 million yuan (+41.1%). 2024Q1 achieved revenue of 670 million yuan (+35.8%); realized net profit attributable to mother of 140 million yuan (+46.1%); net profit after deducting non-return to mother of 140 million yuan (+50%).

The results for the first quarter of 2024 exceeded expectations, and the core product, Wuling capsules, grew at an impressive rate. Based on the advantages of the three core products of Wuling capsules, Bering tablets, and Lingze tablets, which are products in the national essential drug catalogue, the company continues to strengthen market expansion. Among them, sales of Wuling capsules and Lingze tablets have continued to grow well; sales of traditional Chinese medicine formula tablets have increased significantly over the previous year as the number of registered varieties has increased. By category, the revenue of the 2024Q1 Wuling series increased 35.3% year on year, mainly the sales volume and sales amount of Wuling capsules increased by 43.9% and 37.3% respectively over the same period of the previous year; the sales volume and sales amount of Lingze tablets increased by 25.2% and 24.3% respectively over the same period of the previous year; the sales volume and sales amount of Bering tablets increased by 7.1% and decreased by 19% respectively over the same period of the previous year; with the increase in provincial standard filings for formula granules, the revenue of traditional Chinese medicine formula granules increased by 333% over the same period of the previous year; revenue from Chinese medicine tablets increased by 333% compared to the same period of the previous year; revenue from Chinese medicine tablets increased by 333% compared to the same period of the previous year 25.5%; added Zoli Pharmaceutical's commercial sales revenue of 25.985 million yuan.

Procurement has led to a decline in sales rates, and profitability continues to increase. 2024Q1's gross margin was 66.7% (-3.2pp); the company's net margin was 21.4% (+1.4pp). On the cost side, the company's 2024Q1 sales rate is 37.2% (-4.9pp); the management rate is 3.8% (-0.8pp); the financial rate is -0.2% (+0.5pp); and the R&D rate is 2.2% (-1.5pp).

The three major growth engines help to increase performance. 1) Wuling series: The company will actively use the opportunities brought by winning the bid collection to speed up hospital coverage and number of departments, and is expected to exchange price for volume. At the same time, the secondary development of the Wuling series is being promoted, including the secondary development of Wuling capsules for Alzheimer's indications and the development of Wuling compounds. 2) Bailing series: Health insurance restrictions for Bailing tablets will be relaxed starting in January 2024, and regional collection such as the “Beijing-Tianjin-Hebei 3+N” alliance will also bring opportunities. In addition, Tongfang Bailing capsules of the same name were approved for sale in December 2023, and the development of major new products can be expected. 3) Chinese medicine tablets and granules: Tablets are growing steadily; by the end of 2023, the company had completed 335 national and provincial standard registrations for traditional Chinese medicine formula granules. As the number of granules registered increased, while deepening the Zhejiang market and actively developing markets in other provinces, the granules had been working hard for 24 years.

Profit forecasting and investment advice. Net profit due to mother in 2024-2026 is estimated to be $520 million, 630 million yuan, and 770 million yuan respectively, corresponding year-on-year growth rates of 37%/21%/21%, respectively, maintaining the “buy” rating.

Risk warning: risk of sales falling short of expectations; risk of collection; risk of falling short of expectations in research; industry policy risk.