Incident: The company released its 2023 annual report. In 2023, it achieved operating income of 2,693 million yuan (+15.75%), net profit to mother of 368 million yuan (+36.54%), and net profit after deducting non-return to mother of 340 million yuan (+36.91%). In the first quarter of 2024, the company achieved operating income of 591 million yuan (+17.74%), net profit to mother of 126 million yuan (+63.44%), and net profit after deducting non-return to mother of 106 million yuan (+53.90%).

Loxoprofen sodium gel patches are growing rapidly, and the product lineup continues to be rich. The revenue of loxoprofen sodium gel patch in 2023 was about 1,547 billion yuan (+18.70%). Since this variety has been included in collection in Guangdong and other regions since 2023 and implementation has begun one after another, we expect the sales growth rate of this product to be higher than the revenue growth rate. Since various expenses have been reduced after collection, we believe that the impact on the company's profit side is small, and it is conducive to steady medium- to long-term development. The company's product lineup continues to be rich. Ketoprofen was successfully included in the national medical insurance catalogue in 2023. Currently, high-end preparations for transdermal administration such as Jiaoqi Musk Gel Patch, lidocaine gel patch, and indomethacin gel patch have also been declared for production. The company's product fleet continues to be rich, which is conducive to the continuous growth of revenue from topical preparations. The company is actively expanding sales channels. In 2023, the core product loxoprofen sodium gel patch was quickly sold on OTC channels. We believe that the increase in the share of sales through out-of-hospital channels will help increase product profit margins and form brand influence, and help break through the sales ceiling in the hospital market.

Expense rates are continuously optimized, and profitability has been steadily improved. Throughout 2023 and the first quarter of 2024, the company's sales expenses rate continued to decline, mainly due to: (1) the promotion of collection, the reduction in sales expenses for related varieties; (2) the reduction in cost investment after the topical formulation market entered a mature period; and (3) the company's marketing model transformation. We believe that with the optimization of the cost ratio, the company's profitability is expected to increase steadily, and the profit growth rate is expected to exceed the revenue growth rate.

Profit forecasting and valuation. We expect the company's revenue from 2024 to 2026 to be 3.189 billion yuan, 4,081 billion yuan, and 4.906 billion yuan, respectively, with year-on-year growth rates of 18.4%, 28.0% and 20.2% respectively; net profit to mother will be 502 million yuan, 652 million yuan and 830 million yuan respectively, with year-on-year growth rates of 36.3%, 29.8% and 27.4% respectively. Based on the closing price on May 14, the corresponding PE will be 25.8 times, 19.9 times and 15.6 times, respectively, maintaining the “buy” rating.

Risk warning: The procurement price reduction of core products exceeded expectations, and the competitive pattern deteriorated rapidly; the progress of new product release/approval fell short of expectations.