Incident: 1) On August 21, 2024, the company released its 2024 mid-year report. 2024H1 achieved revenue of 2.173 billion yuan (yoy -8.02%) and net profit of 0.489 billion yuan (yoy +8.66%); of these, 2024Q2 achieved revenue of 0.945 billion yuan (yoy -7.08%) and net profit of 0.222 billion yuan (yoy +7.11%).

2) The company announced the 2024 semi-annual profit distribution plan. The company plans to pay a cash dividend of 0.50 yuan per share. If calculated based on the company's total share capital at the end of the 2024 semi-year, the current cash dividend amount accounts for 64.36% of the net profit due to the mother for the half year of 2024.

Revenue side: OTC continues to grow on a high base, the health sector is still in the adjustment stage, and the recovery of the prescription drug business has exceeded expectations. 2024H1 achieved revenue of 2.173 billion yuan (yoy -8.02%), mainly affected by last year's high base. By business:

OTC business: 2024H1 still achieved 2.64% year-on-year growth under the influence of a high base, with a revenue scale of 1.725 billion yuan.

The company adheres to the strategy of “big single products, strong categories” and adopts a multi-category strategy around the four dominant categories of “spleen, stomach, intestines, cough, and mineral supplements”. On the spleen and stomach side, offline food PR activities were carried out around Jiangzhong brand stomach health tablets to penetrate young people; on the gastrointestinal side, a “treatment” combination was established with Beifida by increasing the dissemination of Lihuo brand lactic acid bacteria tablets in the new media; in terms of throat and asthma, with herbal coral lozenges and compound fresh bamboo extract as the core, rich category clusters. Compound fresh bamboo extract achieved revenue growth of more than 30% by developing a blank market at the grassroots level; in terms of supplementing minerals, expanding gas and kidney tonic products.

Big Health Business: 2024H1 Big Health Business achieved revenue of 0.194 billion yuan (yoy -41.74%). The decline was slightly larger than in Q1. It was mainly affected by factors such as increased industry competition, the company's reorganization of business development positions (such as a reduction in projects such as branding and medical supplies wholesale), and optimization of the organizational structure. Big Health focuses on building category clusters around the high-end nourishing category of ginseng herb, the rehabilitation category of the primary series, gastrointestinal probiotics, and the liver health category of pure liver tablets.

Prescription drug business: 2024H1 achieved revenue of 0.236 billion yuan (yoy -27.79%), which was a sharp decrease compared to Q1. The year-on-year decline was mainly due to the fact that some product collection did not win the bid and the price drop after winning the bid for some product collection. Although prescription drugs are not the company's area of strength, the company actively adapted to changes in the industry and recovered beyond expectations. In-hospital and primary care markets are continuously improving terminal coverage; outside hospitals, we are exploring specialty varieties of chronic diseases from Sanghai and Jisheng Pharmaceuticals. We expect that the impact of mining will gradually decrease in the second half of the year, and market development results will gradually become apparent.

Profit side: The sales expense ratio decreased significantly, and the net profit margin increased by 3 pct. 2024H1 achieved net profit of 0.489 billion yuan (yoy +8.66%) to mother. The cost side control is good. The 2024H1 sales expense rate/financial expense ratio was 35.94%/-1.88%, respectively, down 3.47/0.73 pct year on year, and the sales expense ratio decreased significantly; the management cost rate/R&D expense ratio was 3.98%/2.99%, respectively, up 0.05/1.00 pct year on year. The gross margin of 2024H1 was 69.39% (yoy+1.05pct). Among them, the gross margin of the OTC business and the health business increased by 2.20/7.02 pct, respectively, and the gross margin of the prescription drug business declined by 22.03 pct due to changes in product structure due to some product collection and failure to win the bid. 2024H1's net profit margin was 22.50% (yoy+3.04pct), and profitability increased steadily.

The interim report launched mid-term dividends to share development dividends. On March 15, the Securities Regulatory Commission issued “Opinions on Strengthening the Supervision of Listed Companies (Trial)”, which proposed strong restraining measures on dividends. Listed companies are required to formulate active and stable cash dividend policies to clarify investors' expectations. Simplify the mid-term dividend review process, reduce the implementation cycle, promote pre-dividends combining undistributed profits with current performance before the Spring Festival, and enhance investors' sense of attainment. Guide high-quality listed companies with large market capitalization to pay dividends in the medium term and play a leading role in demonstration.

From 2021 to 2023, the company maintained dividends twice a year for three consecutive years. The dividend payment rates were 108.33%/121.02%/115.52%, respectively, and the amount of cash dividends increased year by year. The company responds positively to state-owned enterprise reform and deepening upgrading actions, actively pays cash dividends, stabilizes investor confidence, and shares development dividends.

Investment advice: Jiangzhong Pharmaceutical is a high-dividend+high-quality brand OTC enterprise. It focuses on the gastrointestinal field, complements and perfects categories such as cough, cough, rehabilitation, nutrition, etc., and actively explores online channels through “endogenous+epitaxial” two-wheel drive. We are optimistic about the company's future revenue growth and collaborative optimization under China Resources's management system through category expansion and channel strengthening. The company is expected to achieve revenue of 4.275/4.756/5.425 billion yuan in 2024-2026, up -3%/11%/14% year on year; achieve net profit due to mother 0.795/0.902/1.038 billion yuan, up 12%/13%/15% year on year, respectively; and the corresponding PE valuation is 18/16/14X, respectively, maintaining an “increase” rating.

Risk warning: macroeconomic fluctuation risk; policy risk; increased industry competition; risk of cost fluctuations; product promotion falling short of expectations; R&D risk.