Short-term performance is under pressure, and innovative attributes help long-term development, maintaining that “buy” rating companies achieved revenue of 10.318 billion yuan in 2023 (-17.67% year over year; the following are all year-on-year scales); net profit to mother of 1,352 billion yuan (-42.76%); net profit after deduction of non-return to mother was 1,265 million yuan (-45.58%). 2024Q1 achieved revenue of 2,523 billion yuan (-35.89%); net profit of 304 million yuan (-74.73%); net profit after deducting non-return to mother of 292 million yuan (-75.18%). In terms of profitability, the gross margin for 2023 was 57.28% (-6.49pct), and the net margin was 13.03% (-5.78pct). On the cost side, the 2023 sales expense ratio was 26.21% (+0.21pct); the management expense ratio was 5.74% (+0.85pct); the R&D expense ratio was 8.27% (+0.03pct); and the financial expense ratio was 0.26% (+0.10pct). We are optimistic about the company's development potential in the context of the positive development of innovative traditional Chinese medicine. We expect the company's net profit to be 14.50/15.63/1,730 billion yuan and EPS of 0.87/0.94/1.04 yuan respectively in 2024-2026. The current stock price corresponds to PE of 22.0/20.4/18.4 times, maintaining a “buy” rating.

Sales of cardiovascular products grew steadily. In 2023, there was a clear year-on-year decline in respiratory revenue. In 2023, the company's revenue for cardiovascular products was 4.709 billion yuan (+12.71%), revenue for respiratory products was 3.305 billion yuan (-51.90%), revenue for other patented products was 435 million yuan (+13.82%), and revenue for other products was 1,865 billion yuan (+71.43%). In terms of gross margin, the gross margin of cardiovascular products was 58.36% (-6.53pct), the gross margin of respiratory system products was 69.19% (-0.65pct), the gross margin of other patented products was 59.83% (+2.25pct), and the gross margin of other products was 32.96% (+8.83pct).

Innovative traditional Chinese medicine continues to advance, and the chemical medicine sector develops side by side

In terms of traditional Chinese medicine, the company focuses on core diseases such as cardiovascular, respiratory, and endocrine diseases to create an innovative traditional Chinese medicine evidence chain based on the “three combinations” of traditional Chinese medicine theory, human use experience, and clinical trials, and continues to promote research and development of new products. By the end of 2023, Tongluo Mingmu capsules, a class 1.1 innovative traditional Chinese medicine drug developed by the company to treat diabetic retinopathy, had been successfully marketed, and there were also pediatric Lianhua Qinggan granules and Luopotong tablets in phase III clinical phase. Chaikin Tongxiang tablets and Huaxia cold granules were in phase II clinical stage, and the research pipeline was well stocked. In terms of chemical pharmaceuticals, the company has formulated a step-by-step development strategy of “transfer processing entry - international and domestic double registration of generic drugs - R&D, production and sales of patented new drugs”. With Ling Wanzhou as the core operating platform, it will undertake international and domestic market development work.

Risk warning: Risk of policy changes, product sales falling short of expectations, and new product development falling short of expectations.