Incident: On July 10, the company released its 2024 semi-annual performance forecast. 2024H1 expects to achieve net profit of 0.295-0.31 billion yuan, an increase of 49.24%-56.83% year on year; net profit without return to mother is 0.291-0.306 billion yuan, an increase of 50.23%-57.97% year on year. Among them, 2024Q2 is expected to achieve net profit of 0.153-0.168 billion yuan, a year-on-year increase of 52.27%-67.24%; net profit without deduction of 0.147-0.162 billion yuan, an increase of 50.45% to 65.76% year-on-year.

The 2024H1 revenue and profit side all exceeded expectations, and core product potential continued to be unleashed. On the revenue side, the company expects 2024H1 to increase by 41% year on year. According to this estimate, 2024Q2 revenue is about 0.753 billion yuan, up 46.05% year on year, setting a record high year-on-year growth rate for the past 3 years (after 2021 Q1); on the profit side, the company expects 2024H1 to achieve net profit of 0.295-0.31 billion yuan, an increase of 49.24%-56.83% year on year. We believe that the performance exceeded expectations mainly due to: ① The sales revenue of Wuling capsules and Lingze tablets continued to grow well. On the one hand, the company used the advantages of the three core products of Wuling capsules, Lingze tablets, and Bering tablets as base drugs to speed up hospital coverage and deep cultivation. On the other hand, the National Health and Health Commission comprehensively promoted the construction of close county-level medical communities, which is conducive to the company's sinking into county-level hospitals and primary medical institutions; ② As Wuling capsule collection is implemented in the Beijing-Tianjin-Hebei “3+N” Alliance provinces, the sales rate is expected to drop further; ③ June Internet sales of clean drinks have increased dramatically in hospitals The sales revenue of the Chinese medicine tablet series increased significantly compared to the same period last year; as the number of registered varieties of traditional Chinese medicine tablets increased, sales revenue increased significantly compared to the same period of the previous year.

The company's future performance growth points also include: ① Bailing capsules were approved at the end of 2023. Previously, it was an exclusive product of Huadong Pharmaceutical. According to investor relations records of January 31, 2024, the highest sales scale of Bailing capsules is over 3 billion, and now it also has a scale of nearly 2 billion. The market is relatively broad. Secondly, the company itself has sales experience with different dosage products, and uses hospital-side marketing resources to do a good job in the marketing and sales of Bailing capsules; ② The company strengthens OTC channel exploration and promotion, and hires advantageous third party businesses based on its own OTC team Sales consultants collaborated to increase brand exposure and increase the sales ratio of Wuling capsules on the OTC side by increasing coverage of pharmacies outside hospitals and carrying out sleep health charity; ③ The secondary development of Wuling capsules is expected to increase application scenarios for mild cognitive impairment (MCI) and further upgraded to “3.0 version”.

Investment advice: The company's core products, Wuling capsules, and Lingze tablets, are all in the national drug catalogue. Among them, Wuling capsules and Lingze tablets are exclusive products. The company's main business has strong “hematopoietic” capabilities, and continues to be optimistic about psychotherapy tracks such as anxiety and depression. Considering that the company continues to increase the coverage of hospital terminals and expansion outside the hospital, the core products have good endogenous growth potential, refined management is continuously optimized, and the company's growth continues, we raised our profit forecast. We expect the company to achieve revenue of 2.466/3.024/3.653 billion yuan in 2024-2026, up 27%/23%/21% year-on-year respectively; achieving net profit of 0.528/0.676/0.832 billion yuan, respectively; the corresponding PE valuations are 19/ 15/12X, maintaining a “buy” rating.

Risk warning: macroeconomic fluctuation risk; policy risk; increased industry competition; product promotion falling short of expectations; R&D risk.