Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 2,693 billion yuan, a year-on-year increase of 15.75%, achieved net profit of 368 million yuan, an increase of 36.54% over the previous year, and realized net profit without deduction of 340 million yuan, an increase of 36.91% over the previous year. The first quarter of 2024 achieved revenue of 591 million yuan, an increase of 17.74% over the previous year, achieved net profit of 126 million yuan, an increase of 63.44% over the previous year, and realized net profit without deduction of 106 million yuan, an increase of 53.90% over the previous year.

Comment:

Major core products continue to grow at a high rate, and channels outside the hospital are being actively broadened. In 2023, the company's pharmaceutical sales revenue was 2,236 billion yuan, up 15.86% year on year. Among them, the core single product loxoprofen sodium gel patch achieved revenue of 1,547 billion yuan, an increase of 18.70% year on year, while revenue from other oral preparations was 689 million yuan, up 9.89% year on year. The company's off-campus and offline OTC channels are growing rapidly, and strategic cooperation has been reached with 10 leading chains. The target chain was successfully developed to 280 in 2023, covering a total of 38,000 stores, to promote the rapid release of leading varieties of loxoprofen sodium gel patches.

Profitability continues to increase, and expense ratios are being steadily optimized. The company's net sales margin in 2023 was 13.68%, up 2.09pp year on year, and the sales period expense ratio was 61.86%, down 2.62pp year on year. In the first quarter of 2024, the company's net sales interest rate was 21.27%, up 5.95pp year on year. The sales period expense ratio was 51.44%, down 7.03pp year on year, sales expenses rate 40.50%, down 5.65pp year on year. We believe that the company is actively promoting marketing network construction, strengthening terminal channel control capabilities, and promoting continuous optimization of cost rates and continuous improvement in profitability.

New products are expected to be released quickly, and stocks of varieties under development are abundant. Ketoprofen gel patch participated in national health insurance negotiations for the first time at the end of 2023 and was included in the national health insurance catalogue at a very competitive price, which is expected to enhance the potential for future performance growth. The company has 2 registration certificates for gel paste drugs, and is developing more than 15 topical formulation products, of which 7 have been declared for production. We believe that with “transdermal drug delivery formulations” as the core, the company will conduct in-depth research on basic technologies such as gel patches, establish technical barriers in related fields, and inject new growth momentum into the future with rich research pipelines.

Profit forecasting and valuation. The company has unique technical advantages in the field of topical gel patches. Sales of the core product loxoprofen gel patch continue to grow rapidly, forming an integrated development layout of “pharmaceutical formulation+raw drug+pharmaceutical excipients”. The company's net profit for 2024-2026 is estimated to be 518 million yuan, 694 million yuan, and 897 million yuan, respectively, up 40.7%, 33.8%, and 29.4% year-on-year, respectively. The corresponding EPS is 1.07 yuan, 1.43 yuan, and 1.84 yuan respectively. Referring to comparable companies, we gave the company 28-33X PE in 2024, with a reasonable value range of 29.96-35.31 yuan per share. For the first time, we covered it and gave it a “superior to the market” rating.

Risk warning. The progress of innovative product development fell short of expectations, market competition increased risk, and the volume of core products fell short of expectations.