Key points of investment

Incident: In the first half of 2024, the company achieved operating income of 2.748 billion yuan (+26.80%, up 26.8% from the same period of the previous year, same below), net profit of 0.738 billion yuan (+39.03%) to mother, minus 0.7 billion yuan (+42.79%) of non-net profit. Looking at Q2 alone, the company achieved an operating income of 1.295 billion yuan (+17.89%), net profit of 0.385 billion yuan (+28.01%) to mother, and 0.371 billion yuan (+33.61%) after deducting non-net profit of 0.371 billion yuan (+33.61%), with impressive performance. At the same time, based on a total share capital of 643,976,824 shares as of June 30, 2024, the company distributed cash dividends of 11.44 yuan (tax included) to all shareholders for every 10 shares. The total cash dividend was 0.737 billion yuan, accounting for 99.77% of net profit returned to mother in the first half of 2024.

Gathering brand power, the Ejiao series has outstanding performance: the company continues to consolidate the highland of big health brands and strengthen brand influence through cross-border innovation projects and drama marketing models. 2024H1, the pharmaceutical industry sector achieved revenue of 2.684 billion yuan (+29.3%), and the share of Ejiao and series products further increased.

2024H1, Ejiao and related products achieved revenue of 2.55 billion yuan (+32.52%), and gross margin increased to 75.36% (+2.48pct). By product, Donga Ejiao block has been growing steadily, consolidating the basic performance market. The entire compound Ejiao paste industry chain has created a large variety of qi and blood supplements. The national brand expansion results of Peach Blossom Ji Ejiao Cake have shown results, exploring the second growth curve of “light health”, and “Donga Ejiao Xiaojin Bar” Ejiao instant powder is gradually starting up, bringing good performance.

The company achieved remarkable results in improving quality and efficiency, and increased profitability: 2024H1, the gross margin of the pharmaceutical industry segment was 74.92% (+2.21%), and the company achieved better results in cost control and product pricing. 2024H1, the company's net sales margin was 26.88% (+1.34%), with a steady increase in profitability, with a sales expense ratio of 36.38% (+1.62%), which is an increase in the company's investment in marketing and sales channels. Continued brand investment complements a higher customer conversion rate; the management expense ratio is 4.89% (-1.25%), the financial expense ratio is -2% (+0.32%), and the R&D expense ratio is 2.36% (-0.19%). In the first half of 2024, the company's asset turnover ratio improved, and the quality of operations was good.

Profit forecast and investment rating: Considering the significant growth of the company's Ejiao series products, we raised net profit to mother in 2024-2026 from 1.387/1.642/1.94 billion yuan to 1.418/1.682/1.995 billion yuan, corresponding PE valuation to 22/19/16X. Maintain a “buy” rating.

Risk warning: Market competition increases risks, policy risks, etc.