Key points of investment

2024H1 Enhua Pharmaceutical's performance is in line with our expectations. The anesthetic business continues to grow rapidly. We are optimistic about the company's central nervous system product & follow-up pipeline layout and competitiveness. The impact of stock collection is declining, and high-barrier generic/innovative drugs are being launched one after another, supporting rapid revenue and profit growth.

Financial performance: Revenue and profit growth are in line with expectations

The company announced 2024H1 results: 2024H1 achieved revenue of 2.763 billion yuan, up 15.13% year on year; net profit to mother of 0.629 billion yuan, up 15.46% year on year; net profit after deducting non-return to mother of 0.634 billion yuan, up 16.27% year on year.

In a single quarter, 2024Q2 revenue was 1.406 billion yuan, up 15.09% year on year, up 3.56% month on month; net profit to mother was 0.364 billion yuan, up 14.61% year on year, up 37.08% month on month; net profit after deducting non-return to mother was 0.367 billion yuan, up 16.02% year on year, up 37.19% month on month.

Growth capacity: Anesthetics maintained a relatively rapid growth rate. Looking at the breakdown of new refined marijuana products to drive performance growth, see: 2024H1 pharmaceutical industry achieved revenue of 2.359 billion yuan, YOY 14.51%, of which revenue from narcotic products was 1.522 billion yuan (YOY 20.04%), revenue from psychotropic products was 0.595 billion yuan (YOY 8.17%), revenue from neurological products was 0.08 billion yuan (YOY 8.51%), and other sales revenue was 0.065 billion yuan (YOY -28.98%), API business revenue 0.096 billion yuan (YOY 26.59%); commercial pharmaceuticals achieved revenue of 0.359 billion yuan, YOY 23.64%.

Looking at growth drivers: 2024H1's anesthesia line maintained rapid growth, and its revenue share increased from 52.84% in 2023H1 to 55.09%, and the share continued to rise. We believe: ① with flexible adjustment of brand strategies to meet clinical needs and give full play to the competitive advantage of product differentiation, old products are expected to maintain steady growth; ② new products (oxycodone, remifentanil, sufentanil, TRV130, alfentanyl, etc.) are expected to continue to grow rapidly throughout the year 24 under the joint drive of new and old products. Furthermore, Mental Line & Nervous Line 24H1 escapes the influence of collection and is optimistic that it will achieve steady growth throughout the year, mainly due to: ① the decline in business and deep exploration at the grassroots level in the county; ② the establishment of the Emerging and Sleep Division to further explore the field of insomnia. Uncollected products are expected to maintain relatively rapid growth and gradually resume growth due to business sinking and empty market potential.

Profitability: Q2 increased month-on-month, optimistic that the trend will continue

2024H1 gross margin declined but net margin remained stable. 24H1's gross profit margin was 72.50%, down 1.25pct year on year. Looking at the specific business, the gross margin of the company's anesthetic (-0.9pct), psychiatric (-2.20pct), and other preparations (-8.43 pct) decreased, while neurological (+2.04pct) and commercial (+0.15pct) gross margins increased. The net sales interest rate is 22.67%, which is basically stable. Looking at the cost ratio: the sales expense ratio decreased by 2.57 pct year on year, the management fee ratio increased 0.22 pct year on year, the R&D cost ratio increased 1.00 pct year on year (R&D expenses accounted for 12.78% of industrial income, up 1.26 pct year on year), and the financial expenses ratio decreased by 0.15 pct year on year.

2024Q2 profitability was restored, and both gross profit margin and net margin increased month-on-month. 24Q2's gross profit margin was 74.16%, up 0.01 pct year on year, 3.38 pct month on month, net sales margin 25.75%, down 0.38 pct year on year, and up 6.26 pct month on month. Looking at the cost ratio: the sales expense ratio decreased by 1.69 pct year on year, down 4.26 pct month on month, the management cost ratio increased 1.21 pct year on year, increased 1.32 pct month on month, R&D cost ratio increased 0.75 pct year on year, increased 0.68 pct month on month, financial cost ratio decreased 0.05 pct year on year, and increased 0.3 pct month over month.

Looking ahead to 2024: We expect the overall gross margin to increase slightly as new high-margin narcotics products continue to be released. As the R&D project progresses, the R&D cost rate may increase slightly.

Operating efficiency: Inventory turnover is accelerating, and operating cash flow continues to improve. Judging from operating capacity, the company's accounts receivable turnover ratio was 2.39 in 2024H1, down 2.74 from 2023H1; the inventory turnover ratio was 1.28, up 0.89 from 2023H1. In terms of cash flow, 2024H1's net cash flow/net income from operating activities was 88.07%, a significant increase from 74.62% in 2023H1. The net cash flow from the company's operating activities increased by 39.51% year on year in 2023, mainly due to the year-on-year increase in cash received from the provision of goods and services, and operating cash flow continued to improve.

Profit forecasting and valuation

We maintain our previous profit forecast. We expect the company's 2024-2026 EPS to be 1.24, 1.48, and 1.75 yuan/share, respectively. The closing price on August 1, 2024 corresponds to 21 times the 2024 PE. We are optimistic about the company's central nervous system product & follow-up pipeline layout and competitiveness. The impact of stock preparation collection is declining, and high-barrier generic/innovative drugs are being launched one after another, supporting steady growth in revenue and profits, and maintaining a “buy” rating.

Risk warning

Product sales promotion falls short of expected risks; product development and registration progress falls short of expected risks, etc.