Focusing on the main business of traditional Chinese medicine has achieved remarkable results, and profitability has improved markedly. The company was founded in 2002 and has built a highly competitive product cluster around segments such as cardiovascular, orthopedics, and pediatrics. Since 2021, the company has clarified its strategic position in the traditional Chinese medicine business, and has successively divested Baijun Medical, a nephrology hospital, and Hengxing Technology, a CRO company, to greatly reduce the reporting burden.

According to our estimates, excluding factors such as losses from non-main business subsidiaries, government subsidies, and equity incentive expenses, the compound actual operating net profit growth rate of the company's main pharmaceutical industry was about 38% between 2020 and 2023, and the profit margin increased from 6.9% to 12%. It can be seen that the profitability of the company's main pharmaceutical business also continues to increase.

Multiple products are being released soon, and operating leverage is expected to be released due to scale effects. 1) Orthopedics: Garcinia Cambogia has been selected for the national collection of proprietary Chinese medicines. The decline is moderate, and the profit contribution of the single product is expected to remain stable. At the same time, it is expected to seize the share of competing capsule dosage forms and achieve rapid release. The new class 1.1 drug Xuanqijian Bone Tablets was approved in 2021. The year after approval, it was included in the medical insurance catalogue through negotiations. Currently, admission is progressing smoothly. It is in a period of rapid rise in market expansion, and is expected to more than double throughout the year. 2) Pediatrics: Innovative traditional Chinese medicine pediatric Jingxing cough tablets. Accurate curative effects+clinical research fully supports the efficient development of academic promotion in hospitals. It is expected to enter the pediatric catalogue of basic drugs in the future, further accelerating hospital admission and sales volume. 3) Breathing: Strong Loquat series products have the “Medical Insurance+Basic Medicine” dual catalog qualification and a clear marketing strategy. It is expected to grow into a large product of 5-10 billion for Ci'an's Honey Refined Chuanbei Loquat Cream.

Under policy guidance, innovative traditional Chinese medicine has entered the fast track of development, and the company is about to launch another major new drug. In recent years, a number of top-level policies have been introduced to vigorously promote the inheritance, innovation and development of traditional Chinese medicine; in particular, the publication and implementation of the “Administrative Measures on Drug Registration” and “Registration Classification and Application Data Requirements for Traditional Chinese Medicine” have created favorable conditions for the development and marketing of new Chinese medicines. The company has now formed a large R&D system framework with a “1+N” model. By the end of 2023, the company and its subsidiaries had 144 drug registration approvals and 16 new drug certificates. Among them, Noriton granules, a Class 1.1 innovative traditional Chinese medicine, which is progressing rapidly, are currently supplementing long-term toxicity tests and are expected to be approved for marketing in 2025. Noliton granules target the headache medication market and are expected to become the next major single product.

Profit forecast and investment recommendations: We expect the company to achieve operating income of 18.22, 20.98, and 2,429 billion yuan in 2024-2026, up 11.9%, 15.2%, 15.8% year on year, and achieve net profit of 2.43, 2.91, and 353 million yuan, up 29.9%, 20.0% and 21.2% year on year. The company's 2024-2026 PE is 20, 16, and 14 times. The company is in a period of rapid growth, and the performance growth rate is far ahead of comparable companies. Considering that many of the company's new and old varieties are in a period of rapid expansion, operating leverage is expected to be released under the scale effect, leading to high performance growth, coverage for the first time, and a “buy” rating.

Risk warning: risk of price reduction in collection; risk of sales of core products falling short of expectations; risk of R&D progress falling short of expectations; risk of untimely update of research and usage information data.