Incident: The company released its 2024 semi-annual report and achieved operating income, net profit attributable to mother, and net profit after deducting non-return to mother of 7.817/0.495/0.47 billion yuan, respectively, -13.64%/-12.51%/-17.81% compared with the same period last year. Net operating cash flow - $0.357 billion. EPS (basic) 0.89 yuan. The results were slightly lower than market expectations.

Comment:

Q2 Revenue and profit are under pressure, mainly due to high performance base and disturbances in social inventories. 24Q1-Q2, single-quarter revenue was 4.208/3.609 billion yuan, -4.96%/-21.94% YoY; net profit to mother was 0.247/0.248 billion yuan, +5.05%/-25.00% YoY, putting pressure on revenue and profit for the second quarter. The decline in 24H1's revenue and profit was mainly affected by factors such as the high base for the same period last year and the decline in 24H1 sales revenue due to high social inventories of some products. In the second half of the year, the company's industrial marketing will promote compliance and efficient operation, give full play to the strategic momentum of the product group, strengthen sales and inventory reduction, strengthen channel integration and terminal expansion, drastically reduce fees and increase profits, and make every effort to achieve sales goals.

The pharmaceutical industry's revenue was adjusted in stages, and the health business performed well. Before 24H1 was offset, the pharmaceutical industry/pharmaceutical commercial/Chinese herbal medicine resources/health sector achieved revenue of 50.79/3.741/0.49/0.265 billion yuan, or -19.77%/-10.96%/-16.39%/+79.63% year-on-year. The big health business focused on key products, reshaped sales channels, and promoted overseas business, and achieved rapid volume. Major industrial varieties are divided by treatment sector, with 24H1 respiratory system drug revenue YOY +4.25%, achieving steady growth; 24H1 digestive and metabolic drug revenue YOY -26.34%, mainly due to the decline in sales of Agastache Zhengqi oral liquid. It is estimated to be related to the high base in the same period last year, cooler temperatures in the south and high social stocks in the first half of this year. We expect the adverse effects related to 24H2 will subside significantly; the revenue of 24H1 anti-infective drugs, neurological drugs, and cardiovascular and cerebrovascular drugs all fell by more than 20%, which is estimated to be related to the national medical reform and marketing Mode adjustment Related.

The cost structure is optimized and adjusted, and digital transformation and upgrading are continuously promoted. 24H1 gross margin -3.44pp to 46.71% yoy, net profit margin +0.12pp to 6.33% yoy. Among them, the gross margin of the pharmaceutical industry was -1.91 pp to 62.90% year on year, which is estimated to be related to the decline in sales of various products; the gross margin of the pharmaceutical business was +0.11 pp to 8.78% year on year, which is estimated to be related to commercial collaboration and reduction in procurement costs. In terms of cost ratio, 24H1 sales/management/finance/R&D expense ratios were -3.82/+0.34/+0.09/+0.51 pp to 31.66%/4.28%/0.76%/1.49%, respectively. The company strengthened sales cost control, and R&D investment increased markedly. Under the “One Digital Taiji” strategic plan, the company promotes data governance in an orderly manner, consolidates digital infrastructure, and is expected to improve management efficiency.

Profit forecasting, valuation and rating: The company has deep brand and variety resources. Using Sinopharm as an opportunity to comprehensively promote business reform, implement main product strategies, and optimize marketing models. State-owned enterprise reform has full momentum, and is expected to achieve medium- to long-term high-quality development. Considering the impact of health care reform policies and social inventory disturbances for some products, we lowered the company's 24-26 net profit forecast to 0.948/1.297/1.56 billion yuan (down 13%/6%/6%). The current stock price corresponds to PE 13/9/8 times. Considering the low valuations of leading state-owned enterprises, we maintained a “buy” rating.

Risk warning: Sales of core varieties fell short of expectations; cost control fell short of expectations; reforms fell short of expectations.