Incidents:
On August 11, 2024, Xianle Health released its 2024 semi-annual report. 2024H1 achieved operating income of 1.99 billion yuan, +28.85% year over year; net profit to mother 0.154 billion yuan, +52.66% year over year; net profit after deducting non-return to mother 0.154 billion yuan, +55.48% year over year. 2024Q2 achieved operating income of 1.039 billion yuan, +23.29% year over year; net profit to mother 0.091 billion yuan, +27.38% year over year; net profit after deducting non-return to mother 0.09 billion yuan, +21.18% year over year.
Investment highlights:
Driven by the overseas economy, the first half of the year ended smoothly. By region, the company achieved revenue of 8.3/0.29/0.73/0.14 billion yuan in 2024H1 China/ Europe/ America/ other regions, or +4.2%/+13.8%/+65.4%/+185.7% year-on-year. We believe that in the context of consumer demand pressure, the growth rate in China has slowed but still achieved positive growth; Europe still maintained a bright double-digit growth rate; after merging the BF, sales integration between China and the US achieved business expansion and order growth in the US, which led to high revenue growth; other regions have more than doubled their impressive growth rate, mainly due to companies continuing to expand cooperation with leading Australian customers and actively expand Southeast Asian channels. By business entity, 2024H1 achieved revenue of 1.54/0.45 billion yuan, or +22.3%/+57.4%, respectively. Of these, BF's net profit was -0.065 billion yuan, which is still in the adjustment period.
Core dosage forms such as softgels and gummies maintain impressive growth rates. By product, 2024H1 achieved revenue of 8.9/1.4/1.4/4.9/1.4/1.4/4.9/1.4/0.1/0.08/0.01 billion yuan in softgels/tablets/powders/gummies/drinks/hard capsules, and other forms/other businesses, respectively, of +26.8%/-17.5%/+13.3%/+60.6%/-14.4%/+70.2%/+315.2%/+270.7%. As the company's core dosage form, softgels maintain a high growth rate, and we believe that BF is the main contributor; as the company's dominant dosage form, the volume and price rise sharply. 2024H1 sales volume is +52.18% year-on-year, and the price is +5.50% year-on-year.
Q2 The company's gross margin increased dramatically, and profitability continued to improve. The gross margin of the 2024H1 company was 32.05% (+2.60pct year over year), of which Q2 was 33.35% (+2.41pct year over year), which is a significant increase. We think the main factors are: 1) material cost optimization under global procurement; 2) the release of scale effects brought about by revenue growth. Among them, the gross margin of 2024H1 tablets/powders/gummies/drinks/hard capsules increased 3.11/4.43/6.21/4.66/10.16pct; 3) The increase in 2024H1 technical service revenue led to other business operations YoY +270.72%, gross margin +70.15pct YoY. The 2024Q2 expense ratio increased. The sales/management/finance expense ratio was 7.97%/10.17%/2.16%, respectively, +0.61/+0.40/+1.36pct. The increase in sales expenses was mainly due to sales team upgrade (2024H1 salary +38%) and marketing promotion (2024H1 marketing fee +90% YoY); the increase in financial expenses was mainly due to interest on convertible bonds, interest on bank loans, and exchange gains and losses. In the end, 2024H1 achieved a net profit margin of 7.76% (+1.21pct year over year), of which Q2 was 8.80% (+0.28pct year over year), increasing profitability.
Net profit returned to mother for the whole year is fixed at 0.4 billion yuan, and the incentive target can be expected to be achieved. Looking ahead to the whole year, the company's equity incentive target for 2024 is revenue of at least 4.3 billion yuan, +20% year over year, and net profit target to mother is 0.4 billion yuan, +43% year over year. Among them, net profit to mother needs to exclude share payment expenses from equity incentive plans or employee stock ownership plans and assess the impact of incentives withdrawn during the year.
2024H1's revenue and net profit to mother increased by 28.85% and 52.66%, respectively. Excluding the 6.64 million yuan incentive fee already calculated, according to our estimates, net profit to mother after 2024H1 restoration is expected to be 0.16 billion yuan, +58% year over year, and the growth rate is higher than the annual incentive target. Judging from historical data, revenue in the second half of the year is generally higher than in the first half of the year. If the company maintains a stable net interest rate and the BF in the second half of the year is expected to turn a loss into a win after business rationalization and production capacity climbs, we judge that there is a high degree of confidence that equity incentives will be achieved.
Profit forecast and investment rating: The company is a CDMO leader in the health products industry. It has R&D and production capabilities for various dosage forms, and is committed to dosage form innovation and technology upgrading. Furthermore, the company acquired Best Formulations in the US, set up a cross-border factory in Zhuhai, and built a collaborative global supply capacity with the three major production bases in Shantou, Maanshan, and Germany, and is expected to enjoy the increase in orders brought about by the global layout. Our profit forecast is as follows. We expect the company's revenue from 2024 to 2026 to be 4.313/4.927/5.617 billion yuan, respectively, net profit to mother of 0.388/0.483/0.573 billion yuan, EPS 1.65/2.05/2.43 yuan respectively, and corresponding PE is 15/12/10X, respectively, covered for the first time, giving a “buy” rating.
Risk warning: 1) rising raw material prices; 2) channel expansion falls short of expectations; 3) overseas demand falls short of expectations; 4) industry competition intensifies; 5) food safety issues.