1H24 results fall short of our expectations
The company announced 1H24 results: revenue of 2.81 billion yuan, -8.6% year on year; net profit of 0.34 billion yuan, -19.5% year over year; after deducting non-net profit of 0.32 billion yuan, -12.4% year on year; by quarter, Q1/Q2 revenue was +4.2%/-18.1% year on year; net profit to mother was +21.4%/-56.1% year on year; net profit after net profit +53.3%/-59.7% year on year. The performance fell short of our expectations, mainly due to phased pressure on the revenue of the skincare business, which is in the period of transformation and adjustment, compounded by the increase in one-time costs brought about by changes in the remuneration system under the company's internal management changes, which dragged down profit performance. Follow up on the progress of the company's business transformation.
Development trends
1. Under changes and adjustments, revenue from functional skincare products is under phased pressure, and the medical and aesthetic business continues to grow rapidly. 1H24's revenue ratio was -8.6%, by business: ① Skincare products: revenue of 1.38 billion yuan, compared to -29.7%, mainly because the major brands are still in the phased adjustment stage. The company focused on team adjustments and internal process sorting. Some brand products and channel structures began to show results. Runbaiyan completed the iterative layout of the two major product lines for repair and anti-aging. The online revenue of the White Gauze series increased by more than 30%, accounting for more than 50% of the overall revenue of the brand, and Runbaiyan and Skin Active's self-operated channels accounted for more than 60%; ② Medical terminal business: 0.74 In billion yuan, the same increase was 51.9%, of which medical and aesthetic revenue was 0.56 billion yuan, with the same increase of 70.1%. Furthermore, the coverage rate of medical and aesthetic institutions and the number of products cooperated by single institutions increased significantly, and the coverage rate of 1H24 medical and aesthetic institutions also increased by more than 50%; ③ Raw materials: revenue of 0.63 billion yuan, an increase of 11.0%. Among them, revenue from export raw materials also increased 19.3%, and sales in Europe, Japan, America and other places continued to grow.
2. Product structure optimization led to a slight year-on-year increase in gross margin, and the one-time impact of changes in the remuneration system under management changes led to a year-on-year decline in net interest rate. The gross margin of 1H24 was +0.7ppt to 74.5% year-on-year, mainly due to the increase in the share of high-margin medical and aesthetic business revenue. On the cost side, the 1H24 sales rate was 4.2ppt to 41.9% year over year, mainly due to the promotion of cost reduction and efficiency reforms and a decrease in active investment in the skincare business; the management rate was +2.1ppt to 8.8% year over year, mainly due to the increase in one-time expenses brought about by management changes, and the R&D rate was +1.1ppt to 7.1% year over year. In addition, other revenue, mainly government subsidies, decreased by about 0.046 billion yuan year on year. Under the combined influence, 1H24 net interest rate/-0.5ppt to 12.2%/11.2% year-on-year, respectively.
3. Follow the progress of subsequent internal management changes. Looking forward to the future, we believe: ① Skincare: The company will continue to strengthen the overall management of multi-brand resources, optimize the category system with large single products as the core, strengthen the penetration of the core population, refine the operation and management of the channel structure, and it is expected that healthy growth will resume in the future; ② Medicine and beauty:
The injectable sodium hyaluronate complex solution used to correct severe horizontal lines on the neck was approved by the NMPA for marketing in July '24, and is expected to contribute to growth in the future; ③ Ingredients: Underlying R&D promotes product structure optimization, and the share of sales of innovative hyaluronic acid products and other bioactive substances continues to increase. We are still optimistic about the company's growth prospects as a biotech leader.
Profit forecasting and valuation
Considering that the skincare business is still in the adjustment stage, the 24-25 net profit forecast was lowered by 12%/13% to 0.75/1.03 billion yuan. The current stock price corresponds to 34/25x P/E in 24-25 years. Maintaining an outperforming industry rating, the target price was lowered by 12% to 79 yuan based on profit forecast adjustments, corresponding to 51/37xP/E in 24-25, with 49% upside compared to the current stock price.
risks
Competition in the industry continues to intensify; product quality issues; progress in new product incubation falls short of expectations.