Incidents:

The company recently released an annual report of 2023 and a performance report for the first quarter of 2024: operating income of 9.655 billion yuan (+7.32%) in 2023, with main business revenue of 9.638 billion yuan (+7.37%), split by sales model: pharmaceutical industry revenue of 9.280 billion yuan (+7.56%), pharmaceutical commercial revenue of 359 million (+2.66%); gross profit of 7.871 billion yuan (+5.52%), total profit attributable to listed shareholder companies was 28.23 billion 100 million (+30.04%), net profit of 2,692 million (+32.72%) after deducting non-operating profit and loss. Separated, 2023Q4 had revenue of 3.118 billion yuan (+0.49%), net profit of 889 million yuan (+51.84%), and net profit of 880 million yuan (+52.09%).

In the first quarter of 2024, we achieved revenue of 2.403 billion (+0.60%); net profit to mother of 845 million yuan (+24.90%); and deducted non-net profit of 726 million yuan (+19.83%).

Comment:

A proprietary Chinese medicine company with a stable competitive pattern for main products and strong brand effects. In 2023, the company generated revenue of 3.38 billion yuan (+17.68%) for digestive products, 1,687 billion yuan (-4.60%) for digestive products, $2,741 million (+13.01%) for pediatric products, 640 million (+9.74%) for respiratory products, 84 million (-12.75%) for cardiovascular products, and 41 million yuan (-24.29%) for gynaecological products; among them three fever cleavers Total sales revenue as a share of the current period 73.33% of main business revenue. In the first half of 2023, Pudilan anti-inflammatory oral solution accounted for 12.10% of the proprietary Chinese medicine market for fever clean-up and detoxification drugs in urban public hospitals across the country, ranking 2nd; pediatric tempeh clean-up granules accounted for 46.52% of the proprietary Chinese medicine market for pediatric colds in public hospitals, ranking 1st. In addition, the company's products, Stomach Health and Digestive Oral Liquid, had a market share of 57.9%, ranking first in the market share of proprietary Chinese medicines for stomach health and digestion in urban public hospitals; the company's products, Sanao Tablets and Huanglong cough tablets, ranked 4th and 11th respectively as the brands of proprietary Chinese medicines for cough relief, expectoration, and relief of asthma in urban public hospitals in China, with a total market share of 4.16%.

Accelerate drug research and development, and continue to stimulate innovation. By the end of 2023, the company had submitted 5 applications for new Chinese invention patents, obtained 5 Chinese invention patent authorizations, 464 million (-16.07%), R&D investment accounted for 4.97% of the company's revenue, and 13.31% of the company's total number of R&D personnel was 696 people, of which 2023Q4 R&D expenses were 130 million (-56.85%); 4 pharmaceutical consistency evaluation research projects entered 6 pre-BE or BE projects. We believe that the company is deeply involved in the pediatric and antipyretic drug market and promotes drug research and development business with a long-term layout, which is expected to bring substantial performance contributions to the company in 2025.

Profit forecast and investment advice: The company is expected to achieve revenue of 101.59/112.02/11.903 billion yuan and net profit to mother of 30.01/32.55/ 3.476 billion yuan in 2024-2026, corresponding earnings per share of 3.26/3.53/3.77 yuan/share, corresponding PE is 13/12/11 times. Refer to the same industry valuation to maintain an “gain” rating.

Risk warning: the risk of price reduction in collection, risk of sales falling short of expectations, risk of profit falling short of expectations.