Due to large fluctuations in financial data on real estate divestments during the same period last year, the core business remained stable. In the first half of the year, the company achieved revenue of 1.925 billion/yoy -22.15%, and achieved net profit of 0.127 billion/yoy -33.18%, mainly due to the impact of the divestment of the real estate development business in the same period last year. After excluding related impacts, the company's revenue also increased by 1.48%, and net profit to mother also increased by 2.87%. The cosmetics business achieved revenue of 1.186 billion/yoy +7.24% in the first half of the year, and the core subsidiary Freda Biotech achieved net profit of 89.68 million/yoy +13.72% in the first half of the year, maintaining steady growth. The company plans to pay 0.5 yuan (tax included) for every 10 shares in the medium term, with a dividend payment rate of 39.94%.

By sector, Q2 cosmetics business revenue was 0.642 billion/yoy +1.5%. Among them, Dr. Aier/ Yi Lian achieved revenue of 0.35/0.25 billion, respectively, or -1.1%/+11.8% compared to the same period last year. Affected by the intensification of competition in traditional online channels and the development period for new product lines. The gross margin was 60.7% /yoy-2.5pct. The decline in gross margin was mainly due to an increase in the share of offline distribution revenue and increased promotional activities. The pharmaceutical business achieved revenue of 0.131 billion/yoy -11.3%, with a gross margin of 49.8% /yoy-6.3pct. This was affected by overall policy adjustments in the pharmaceutical industry, compounded by last year's higher base, leading to a significant decline in revenue and gross profit. The raw materials business achieved revenue of 0.088 billion/yoy -6.6%, and a gross margin of 48.4% /yoy+8.7pct. By expanding pharmaceutical-grade hyaluronic acid products and actively promoting raw material exports, the company led to an increase in gross margin.

Financial data fluctuated due to the impact of real estate business in the same period last year. 2024Q2's gross margin/net margin was 52.75%/8.04% respectively, up +3.53/1.34pct year-on-year, mainly because the same period last year included some low-margin real estate businesses. In terms of cost ratios, 2024Q2 sales/management/R&D/finance expense ratios were +3.25/ -0.04/0.26/ -1.03pct, respectively. The impact of real estate business during the same period last year led to changes in cost rates.

In terms of operating capacity, the number of inventory turnover days in the first half of 2024 was 116 days, a year-on-year decrease of 3175 days; the number of accounts receivable turnover days was 43 days, up 10 days year-on-year, mainly affected by the real estate business in the same period last year. In terms of cash flow, 2024Q2's net operating cash flow was 0.098 billion, a year-on-year decline of 47.78%, mainly due to the cash flow in the same period last year, including before the divestment of the real estate business.

Risk warning: macro-environmental risks, sales falling short of expectations, and increased industry competition.

Investment advice: In the context of the macro-consumption environment and increased competition in the industry, the company's cosmetics and pharmaceutical sector is under certain operating pressure. However, with the transformation of the company's main business this year and the implementation of corresponding organizational management adjustments, in the future, the company will use the advantages of integrated production, research and marketing to broaden its omni-channel business layout and focus on developing a large health sector with the cosmetics business as the core, which is expected to gradually stimulate growth potential. At the same time, potential optimization incentives and related capital outreach are also expected to inject new momentum into the company's development. Considering that the company's pharmaceutical business revenue is greatly affected by industry policies; at the same time, competition in the cosmetics industry is fierce, and gross margin declined due to increased promotion efforts. We lowered net profit to mother in 2024-26 to 3.24/3.74/4.26 (original value was 0.343/0.414/0.477 billion yuan), corresponding PE was 19/17/15 times, maintaining the “superior over market” rating.