Incidents:

On August 21, 2024, the company released its 2024 interim report. In the first half of 2024, the company achieved operating income of 2.173 billion yuan, down 8.02% year on year; realized net profit of 0.489 billion yuan, up 8.66% year on year; realized net profit deducted from non-mother 0.471 billion yuan, up 13.06% year on year. Looking at a single quarter, in Q2 2024, the company achieved operating income of 0.945 billion yuan, a year-on-year decrease of 7.08%; realized net profit to mother of 0.222 billion yuan, an increase of 7.11% over the previous year; and achieved net profit after deducting non-return to mother of 0.207 billion yuan, an increase of 9.41% year-on-year.

Over-the-counter medicines are growing steadily, while prescription drugs and health are declining.

On the revenue side, the company's non-prescription drug business grew steadily, while the prescription drug business and health business declined year-on-year. 1) Non-prescription drugs: In 2024, H1 achieved operating revenue of 1.725 billion yuan for non-prescription drugs, an increase of 2.64% over the previous year. The company continued to expand the “Spleen, Stomach, Intestinal, Throat, Cough, and Mineral Supplements” matrix, increasing the “Jiangzhong” and “Lihuo” brand promotion, focusing on promoting core varieties such as stomach health tablets, lactobacillins, and multi-dimensional tablets. 2) Prescription drugs: In 2024, H1 achieved operating income of 0.236 billion yuan for prescription drugs, a year-on-year decrease of 27.79%, mainly due to the fact that the collection of some prescription drugs did not win the bid, leading to overall market contraction and price decline. 3) Big Health: In 2024, H1's Big Health products and others achieved revenue of 0.194 billion yuan, a year-on-year decrease of 41.74%, mainly due to the relatively high base for the same period last year, the company reorganized its business development positioning and optimized its organizational structure, and the progress of business development slowed down.

The effect of improving quality and efficiency and controlling fees is remarkable, and profitability has been greatly improved.

In 2024, H1's overall gross margin reached 69.04%, up 1.05 pct year on year. Among them, the company's gross margin of non-prescription drugs reached 75.05%, up 2.20 pct year on year, which contributed greatly to the company's overall gross margin increase. We estimate that the increase in the company's gross margin was mainly due to changes in product structure and control of production costs. The company adheres to lean production and intelligent manufacturing, continuously strengthens energy saving and emission reduction, and actively promotes lean management system construction to promote the company's quality and efficiency. In 2024, H1's net interest rate to mother reached 24.14%, up 3.50 pct year on year; net interest rate after deduction reached 21.69%, up 3.67 pct year on year; we believe that the significant increase in the company's net interest rate was mainly due to good control of sales expenses. In 2024, H1's sales expenses rate was 35.94%, a year-on-year decrease of 3.47 pct. Judging from the breakdown of sales expenses, H1 marketing expenses in 2024 were 0.485 billion yuan, a year-on-year decrease of 0.165 billion yuan, others Costs have changed relatively little.

Chinese medicine high-dividend label stocks will launch mid-term dividends.

As a Chinese medicine high-dividend label stock, the company's 2021-2023 cash dividend amounts were 0.548 billion yuan, 0.724 billion yuan, and 0.818 billion yuan, respectively. The cash dividend ratios were 108.33%, 121.46%, and 115.52% (excessive dividends for 3 consecutive years), and the annual dividend rates were as high as 6.02%, 7.96%, and 6.23%, respectively. The 2024 Interim Report Company announced a mid-term dividend. It plans to distribute a cash dividend of 5 yuan (tax included) for every 10 shares. The cash dividend amount is expected to reach 0.315 billion yuan, and the cash dividend amount accounts for 64.36% of net profit returned to mother in the first half of 2024.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 4.214 billion yuan, 4.693 billion yuan, and 5.23 billion yuan, respectively, and net profit to mother of 0.818 billion yuan, 0.919 billion yuan, and 1.033 billion yuan, respectively. The corresponding PE valuations are 16.9 times, 15.0 times, and 13.3 times, respectively. We gave the company a buy-A investment rating, with a target price of 26.00 yuan for 6 months, which is equivalent to a dynamic price-earnings ratio of 20 times in 2024.

Risk warning: risk of fluctuating raw material prices; risk of price reduction in prescription drug collection; drug retail price supervision policy risk.