Incident: The company released its 2024 semi-annual report. During the reporting period, it achieved revenue of 2.748 billion yuan (YoY +26.80%), net profit of 0.738 billion yuan (YoY +39.03%), net profit of 0.7 billion yuan (YoY +42.79%); Single Q2 achieved revenue of 1.295 billion yuan (YoY +17.89%), net profit to mother 0.385 billion yuan (YoY +28.01%), net profit of 0.371 billion yuan (+33.61% year over year) The performance was in line with expectations.

Product revenue structure optimization. 2024H1 Ejiao series products achieved revenue of 2.551 billion yuan (+32.52% year over year). Among them, the share of Ejiao block decreased, the share of compound Ejiao paste gradually increased, and the share of Taohuaji Ejiao cake remained stable. Sales performance of major products was good. Overall OTC terminal distribution increased by about 10%. Among them, Ejiao block achieved single-digit growth, compound Ejiao paste increased by more than 20%, Ejiao cake increased by about 20%; overall net sales of medical terminals increased by more than 10%. Channel inventory remains at a low water level in the benign range. The inventory cycle for Ejiao block/compound Ejiao pulp/Ejiao cake is within 3 months/80 days/about 10 days, respectively. Currently, the company is in a period of rapid transformation and development. We are optimistic that its new channels and new product+compound Ejiao paste medical insurance limit will drive continuous revenue growth, combined with equity incentives and potential extended mergers and acquisitions. We believe that the company's revenue growth is quite certain.

Profitability reached a record high. The gross margin of the 2024H1 company is 73.54%, +3.20pct year on year. We expect it to be mainly due to the increase in the share of Ejiao series products, especially compound Ejiao paste; the sales cost rate/management cost rate/R&D cost ratio are 36.38%/4.89%/2.36%, respectively, +1.62 pct/-1.25pct/-0.19pct. We believe that the increase in sales expense ratio is mainly due to the company's increased advertising; the net sales margin is 26.88%, +2.34pct year on year. We expect net interest rates to continue to rise as the company's diversified strategy continues to advance.

Operational efficiency also reached a new high since 2019. 2024H1 Company's inventory turnover/accounts receivable turnover/total asset turnover ratio was 0.74 times/13.86 times /0.21 times, up 0.22 times/+9.09 times/+0.04 times compared to the previous year, which greatly improved operating efficiency; the net cash flow from operating activities was 0.922 billion yuan, +22.57% over the same period last year. The dividend ratio is high, 99.60% in 2023, and the dividend ratio has remained above 96% for the past 3 years. The 2024 mid-term dividend is to distribute cash of 11.44 yuan (tax included) to all shareholders for every 10 shares, with a total cash dividend of 0.737 billion yuan.

Maintain a “buy” rating. We expect net profit to be 1.459/1.756/2.086 billion yuan in 2024-2026, up 26.76%/20.39%/18.77% year-on-year, and EPS of 2.27/2.73/3.24 yuan, corresponding to PE21.59/17.93/15.10x. Considering that the company nourishes old brands and is unlikely to reduce prices for core products, the first phase of the Restricted Stock Incentive Plan (draft) stimulated management's motivation, achieved remarkable results, and maintained a “buy” rating.

Risk warning: risk of policy adjustments; risk of cost fluctuations; volume of second-tier products falling short of expectations.