Key points of investment:

The company's H1 and Q2 performance surpassed expectations, and H1 profit almost exceeded 23 H1 performance forecast for the full year: The company 24H1 is expected to achieve net profit of 6.9 to 0.75 billion, an increase of 99.4% to 116.8% year on year; it is expected to achieve net profit without return to mother of 6.6 to 0.72 billion, an increase of 103.4% to 122.1% year on year.

Q2 single quarter results forecast: The company expects to achieve net profit of 3.6 to 0.42 billion yuan in Q2, an increase of 115 to 151% year on year; net profit without deducted back to mother is 3.3 to 0.39 billion yuan, an increase of 116% to 156% year on year.

Product structure optimization, cost reduction, efficiency increase profit

Product structure optimization combined cost reduction and efficiency, leading to a variable improvement in performance quality. We believe that the strong performance of the company's performance is mainly due to:

Structural optimization: Actively seize market opportunities, continuously adjust product structures, and increase sales of some high-margin products. The company's gross margin in the API sector increased sharply from 12.94% in '22 to 23.84%. Currently, the antibiotic industry chain is booming, and APIs and intermediates are at a high level. The company is actively adjusting its product structure, and the sales scale of some high-margin products has increased year-on-year. We expect the antibiotic industry chain to remain strong, and the gross margin of the company's APIs sector will continue to rise.

Improving quality and efficiency: As a Sinopharm chemical platform, we have carried out in-depth quality and efficiency improvements. Through improving process technology, strengthening integrated management, and large-scale production, production costs have decreased over the same period last year.

Cost reduction and fee control: The company continues to promote cost reduction and fee control to boost management efficiency. Expenses fell significantly year-on-year during the period, and there is huge room for improving the company's operating efficiency. The company's sales expenses rate gradually declined from 29.59% in 2019 to 17.84% in 2023, and 2024Q1 declined further to 14.52%. This is mainly due to the promotion results of the company's cost reduction and efficiency project system and the fact that most of the company's over 100 million formulation products are included in collection, extrusion, and sales expenses. We expect cost reduction and efficiency to continue to advance, and there is still room for improvement in the company's various expense ratios.

In the first year of the Sinopharm merger and acquisition, book monetary capital was sufficient, and there was support for epitaxial investment mergers and acquisitions.

As of the 2023 annual report, the company's total assets were 19.352 billion yuan and total liabilities were 5.014 billion yuan; the company's balance ratio gradually declined from 48.72% in 2018 to 25.91% in 2023. In 2023, the company's book capital was 5.973 billion yuan, and sufficient cash on hand provided support for the company's outward investment mergers and acquisitions. It is expected that the company will actively expand the industrial chain, improve the business layout, and increase the epitaxial industrial layout.

Profit forecasting and investment advice

The company's performance continues to exceed expectations, and its strong performance is expected to continue in the context of continued implementation of Sinopharm reforms. Therefore, we adjusted the company's 2024-2026 revenue growth rate from -5%/0%/0% to 3%/6%/7%, and adjusted the company's net profit growth rate in 2024-2026 from 37%/17%/13% to 67%/17%/14% (not considering future mergers and acquisitions), and EPS was 0.86/1/1.14, respectively. Considering that the company is a unified chemical industry platform under the Sinopharm Group, it has the advantage of engineering and medical collaboration within the Sinopharm Group, and the national reform is expected to continue to improve the company's performance and maintain a “buy” rating.

Risk warning

Prices of antibiotic raw materials and intermediates have declined, and the cost reduction and efficiency of the national reform fell short of expectations.