Incident: On April 25, Guilin Sanjin released the “2023 Annual Report” and “2024 First Quarter Report”. In 2023, the company achieved operating income of 2.112 billion yuan, up 10.8% year on year; realized net profit of 421 million yuan, up 27.9% year on year; basic EPS 0.72 yuan/share, up 28.6% year on year; 2024Q1, the company achieved operating income of 483 million yuan, a decrease of 32.6% year on year; basic EPS was 0.17 yuan/share, a year-on-year decrease of 41.4%.

The first phase of the employee stock ownership plan was successfully completed. In 2023, the company's gross margin/net margin was 73.00%/19.40%, up 2.02/2.59 pct, respectively; the cost ratio for the period was 49.02%, down 2.77 pcts year on year, with sales/management/R&D expense ratios +5.59/-4.66/-3.79 pct, respectively. The company increased its advertising expenses, promotion fees and rebates. By product, the industrial sector achieved annual revenue of 2,098 billion yuan, up 12.3% year on year. By main group, the parent company achieved revenue/net profit of 18.33/ 604 million yuan, up 12.0%/3.9% year on year; Hunan Sanjin achieved revenue/net profit of 1.51/30 billion yuan respectively, up 15.2%/61.3% year on year; and Shanghai Sanjin achieved revenue/net profit of 0.54 to 219 million yuan respectively, a year-on-year decrease of 10.7%/28.1%. Looking at the whole year, the company's proprietary Chinese medicines and chemicals grew rapidly, and their performance was high and low, effectively meeting the demand for drugs that broke out during the special period; the effect of reducing losses in the biopharmaceutical sector was obvious. The first phase of the shareholding plan had the expected results. The revenue growth rate remained above 10% in 21-23, which was significantly higher than in the past. The company's management adds fresh ideas on the basis of continuing succession, and looks forward to further stimulating the vitality of subsequent plans.

First-quarter results returned to normal pace. The large decline in Q1 performance was mainly due to last year's high base and the impact of the pandemic in recent years on the company's business pace. Results were confirmed in the first half of the year. As demand distribution returns to normal, the company will also return to normal operation, and the annual results will be reflected in a more balanced manner in each quarter. With the rise in people's health awareness and the advent of traditional Chinese medicine policies, the company holds the leading brands in the segmented circuit, and the core proprietary Chinese medicine business is still expected to maintain steady growth; in the short term, the company is also actively seeking countermeasures to improve the difficult situation in the biopharmaceutical sector, which has a great impact on performance.

The company's dividend policy is expected to continue. According to the “Notice on the 2023 Profit Distribution Plan” issued by the company, the company will pay a cash dividend of 176 million yuan, accounting for 41.8% of net profit due to the mother in 2023, plus the previous cash dividend of 176 million yuan on profits for the first three quarters of 2023, accounting for a total of 83.7% of net profit for 2023, and a dividend rate of 4.20% based on the current (April 30, 2024) calculation. In 2021-2023, the company paid dividends twice a year, with dividend ratios of 152.4%, 142.6%, and 83.7%, respectively.

As of 24Q1, the company still has 933 million yuan in monetary capital. There is sufficient cash to guarantee the company's daily operation and development. In the absence of special capital requirements, the company's dividend policy is expected to continue.

Investment advice: As an established traditional Chinese medicine company, the company has two well-known traditional Chinese medicine products, the watermelon cream series and the three gold tablets series. The core product base is stable, the market share is outstanding, and the performance share is high. It is expected that it will continue to benefit from people's attention to throat health care and aging trends in the post-pandemic era, which is the guiding principle for the company's performance. The company's multiple second-tier products have reached a scale of quasi-100 million. Subsequent targeted superposition of sales resources helped accelerate its “1 to 10” growth process and form a second growth curve. Overall, the company has been operating at a low profile for a long time, and there is room for improvement and upgrading in many directions. With the upcoming adjustments to the new version of the basic drug catalogue, many products are facing a development window. The biopharmaceutical sector has had an obvious drag in recent years. As efforts to reduce losses and increase efficiency continue to advance, the company's performance is expected to improve significantly. We predict that the company's 2024-2026 EPS will be 0.80, 0.89, and 1.02 yuan/share, respectively, and the corresponding PE will be 17.8x, 16.0x, and 14.0x, respectively, maintaining a “buy” rating.

Risk warning: Industry policy risks, loss reduction and fee control effects fall short of expectations, competition increases risk, and raw material prices fluctuate.