Incident: The company released its 2024 semi-annual report. 2024H1 achieved operating income of 1.428 billion yuan (yoy +41%), realized net profit of 0.296 billion yuan (yoy +50%), and net profit of non-return to mother of 0.292 billion yuan (yoy +51%). Among them, 2024Q2 achieved revenue of 0.755 billion yuan (yoy +46%), net profit of 0.154 billion yuan (yoy +53%) in a single quarter, and net profit of 0.148 billion yuan (yoy +52%) after deducting non-return net profit of 0.148 billion yuan (yoy +52%).

Comment:

The growth rate of Wuling series products and Chinese herbal medicine tablets was impressive, and the net interest rate of 2024H1 increased by about 1 percentage point. ① 2024H1 achieved 41% revenue growth, mainly due to the growth of Wuling series products and Chinese medicine tablets. 2024H1's revenue from the Wuling series products increased 29.15% year over year. Among them, revenue from Wuling capsules increased by 28.86% year on year; Lingze tablets increased by 30.84% year on year. Both Wuling capsules and Lingze tablets have entered the national essential drug catalogue. The company continues to strengthen market expansion using the advantages of the national essential drugs catalogue, thereby driving rapid revenue growth. At the same time, 2024Q2 sales of traditional Chinese medicine tablets on the Internet in hospitals increased sharply in a single quarter, driving the revenue of the Chinese medicine tablet series products to increase by 57.11% year-on-year. In addition, with the increase in registered varieties of traditional Chinese medicine formula granules, the revenue of 2024H1 traditional Chinese medicine formula granules increased by 256.73% year-on-year. ② The growth rate of 2024H1's net profit to mother was higher than the revenue growth rate, mainly due to the decline in the expense ratio during the period. The 2024H1 company's expense ratio fell by about 9 percentage points year on year to offset the negative impact of the decline in gross margin (the decline in gross margin was mainly due to changes in the product structure, and the tablet business grew rapidly, while the gross margin of the tablet business was relatively low, which lowered the 2024H1 gross profit margin), thus increasing the company's 2024H1 net interest rate by about 1 percentage point year on year (2024H1's net interest rate was 20.99%). 2024H1

In-depth development of Wuling Series+Bering Series products is expected to contribute to the second growth curve: ① 24H1 Wuling capsules have been added to 7 clinical guidelines and expert consensus, and have now been recommended by 69 clinical guidelines, clinical pathways, expert consensus, and textbook monographs. The company continues to conduct in-depth research on the Wuling series of varieties, and conducts AD animal pharmacodynamics research and real-world clinical research on the therapeutic application of Wuling capsules in the field of Alzheimer's disease. At the same time, 2024H1 Lingze tablets are listed as a national second-level traditional Chinese medicine protected variety, and the company is stepping up research on the expanded clinical application of this product. In addition, 2024H1's innovative traditional Chinese medicine Lingxiang tablets, formulated by Chinese medicine masters, have obtained a clinical trial approval notice approved by the State Drug Administration. ② Bering has now been recommended by 11 clinical guidelines, expert consensus, and textbook monographs, including “Guidelines for the Management of Chronic Obstructive Pulmonary Disease in the Elderly” and “Guidelines for Clinical Application of Proprietary Chinese Medicines (Respiratory Diseases)”. On December 29, 2023, the company's Bailing Capsule obtained the “Drug Registration Certificate” issued by the State Drug Administration, making it the first homologous drug of the same name approved in China. As of 2024H1, Bailing Capsule has completed networking work in 28 provinces, autonomous regions, and municipalities directly under the Central Government. We believe that if the company completes market entry and other matters, Bailing Capsule is expected to gradually contribute to the second growth engine in the future.

Repurchasing shares for subsequent equity incentive plans is expected to fully stimulate employees' enthusiasm. The company plans to repurchase the company's shares with its own funds through centralized bidding transactions for later implementation of the equity incentive plan. In terms of the specific plan: ① In terms of the repurchase amount, the company plans to use its own capital not less than 0.2 billion yuan (inclusive) and no more than 0.3 billion yuan (inclusive) to repurchase shares. ② In terms of the repurchase price, the repurchase price is no more than 20 yuan/share. ③ In terms of the number of repurchases, the number of shares repurchased was 10 million to 15 million shares, accounting for 1.43% to 2.14% of the company's total share capital. We believe that implementing equity incentives will help motivate employees, and that the company's repurchase of shares at this point also shows the company's confidence in future business prospects.

Profit forecast: We expect the company's revenue for 2024-2026 to be 2.5 billion yuan, 3.074 billion yuan, and 3.78 billion yuan, respectively, with year-on-year growth rates of about 29%, 23%, and 23% respectively, and realized net profit to mother of 0.536 billion yuan, 0.667 billion yuan, and 0.833 billion yuan, respectively, with year-on-year increases of about 40%, 24%, and 25%, respectively. Corresponding to the current stock price PE is 18 times, 15 times, and 12 billion yuan respectively times.

Risk factors: Product sales fall short of expectations, hospital development progress falls short of expectations, market competition intensifies, new product sales fall short of expectations, and product development falls short of expectations.