Incident: On April 18, the company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 1,942 million yuan (+7.61%) and net profit of 383 million yuan (+40.27%); of these, 2023Q4 achieved operating income of 477 million yuan (yoy +3.63%), and realized net profit of 96 million yuan (yoy +39.14%); 2024Q1 achieved operating income of 673 million yuan (yoy +35.75%), achieving net profit to mother 1.42 billion yuan (yoy +46.14%).

The core product Wuling series continues to grow in 2023, and Bering tablets and Chinese medicine formula granules are expected to usher in improvements. The company adheres to the strategic goal of “one, two wings”, and exploits the strategic advantages of the three basic drugs (Wuling capsules, Bering tablets, and Lingze tablets) and the proprietary pharmaceutical market including the exclusive variety of Linglian granules, the homologous drug Bailing capsules, and chemical polycarbo non-calcium tablets, as well as traditional Chinese medicine tablets and traditional Chinese medicine formula granules, and has taken many measures to expand marketing channels. In 2023, the Wuling series and the Chinese medicine tablet series achieved revenue of 1,228/461 million yuan, an increase of 12.42%/22.01% year on year; the Bering tablet series and traditional Chinese medicine formula granules achieved revenue of 2.02/0.42 respectively, a decrease of 21.23%/29.36% year on year. The increase in the Wuling series is mainly due to the increase in sales volume and sales amount of the core product Wuling capsules by 17.51% and 9.12% respectively over the same period of the previous year; the sales volume and sales amount of Lingze tablets increased by 31.48% and 31.96%, respectively, compared to the same period of the previous year. The growth of the Chinese herbal medicine series has mainly benefited from favorable national policies. The company is deeply involved in the provincial market with Greater Hangzhou as the center. The decline in the Bailing series was mainly due to a drop in the collection price of Bailing films. Sales remained basically flat, and revenue decreased by 21.18%. The decline in traditional Chinese medicine formulations is mainly due to national standards and provincial standard filings, etc., and performance is expected to improve as early work paves the way.

2024Q1's revenue and profit both increased, and traditional Chinese medicine formula granules performed well. 2024Q1 achieved operating income of 673 million yuan (yoy +35.75%) and net profit to mother of 142 million yuan (yoy +46.14%). The Wuling series and Chinese medicine tablets continued to grow at a high rate. Among them, the sales volume and sales amount of Wuling capsules increased by 43.86% and 37.25% respectively compared to the same period of the previous year. The sales volume and sales amount of Lingze tablets increased 25.19% and 24.33% respectively over the same period of the previous year, and the revenue of Chinese herbal medicines increased 25.50% year on year. Traditional Chinese medicine formula granules improved significantly, and revenue increased by 332.99% year on year. As of April 18, 2024, the company has completed 335 national standard provincial standard registrations for traditional Chinese medicine formula granules. The sales volume of Bering Film increased 7.11% year on year, and sales volume fell 18.98% year on year. The impact gradually weakened compared to 2023. It is expected that sales will increase further.

Expense rates continue to be optimized, and profitability has improved markedly. In 2023, the company's sales expense ratio, management expense ratio, and financial expense ratio were 40.03%/4.98%/-0.73%, respectively, down 6.00/0.04/1.01pct from the previous year, and the net profit margin was 19.71% (+4.59pct). 2024Q1's sales expense ratio, management expense ratio, and financial expense ratio were 37.23%/3.84%/-0.15%, respectively, -4.88/-0.76/+0.50pct year-on-year, respectively, and the net profit margin to mother was 21.16% (yoy+1.50pct). The company reduced costs significantly and increased efficiency, and its profitability continued to improve.

Increase investment in R&D in multiple areas, dig deeper into product value, and further enrich the product matrix. The company spent 79 million yuan on R&D in 2023 (+23.20%), and the R&D expenditure rate was 4.09% (+0.52pct). The progress of the main R&D projects of the Wuling series is: the second development of Wuling capsules has entered 9 new clinical guidelines, clinical pathways and expert consensus; the clinical application for the innovative drug Lingxiang tablets was hosted by the CDE on February 27, 2024; Lingze tablets completed 1,800 new real-world clinical studies in 2023, and 1 basic research paper and 2 clinical research papers were published. In addition, the national standard varieties of “turmeric (turmeric)” formula granules independently developed and researched by the company have been announced, and warm yam (ginseng potato) formula granules and large blood vine formula granules independently developed and studied have been included in the provincial standard.

Investment advice: The company's core products, Wuling capsules, and Lingze tablets, are all in the national drug catalogue. Among them, Wuling capsules and Lingze tablets are exclusive products. The company's main business has strong “hematopoietic” capabilities, and continues to be optimistic about psychotherapy tracks such as anxiety and depression. The company is expected to achieve revenue of 2,435/29.86/3606 billion yuan in 2024-2026, up 25%/23%, respectively; achieve net profit of 4.97/6.24/767 billion yuan, up 30%/26%/23% year on year; corresponding PE valuations are 19/15/12X, respectively. Considering the company's continued increase in hospital terminal coverage and out-of-hospital expansion, core products have good endogenous growth potential, and refined management is continuously optimized. The company has strong growth and maintains a “buy” rating.

Risk warning: macroeconomic fluctuation risk; policy risk; increased industry competition; risk of cost fluctuations; product promotion falling short of expectations; R&D risk.