Incident: The company released its 2024 semi-annual report. During the reporting period, it achieved operating income of 1.366 billion yuan, a year-on-year increase of 12.19%, and net profit to mother of 0.284 billion yuan, an increase of 43.77% year-on-year, after deducting non-net profit of 0.255 billion yuan, a year-on-year increase of 43.

24%.

The Q2 return growth rate was 30% +, and the performance exceeded expectations under a high base. In the second quarter of a single quarter, the company achieved revenue of 0.775 billion yuan, +8.31% year on year; realized net profit of 0.158 billion yuan, +31.24% year on year; achieved deducted non-net profit of 0.149 billion yuan, +36.52% year over year; against the backdrop of a high base for the same period last year, the second quarter still achieved high growth, mainly due to the stable volume of gel paste and an increase in profit margins under cost optimization.

The formulation sector maintains its advantage, and the API business is growing at an impressive rate. By business: (1) Formulations: In the first half of the year, revenue was 1.086 billion yuan, +7.5% year over year; gross profit margin was 82.55%, down 4.09pp year on year. We expect it is mainly related to the selection of loxoprofen sodium gel patch for provincial collection in many places. In the field of topical patches, the company's two major varieties of loxoprofen sodium and ketoprofen gel patches are in the rapid release stage. Furthermore, lidocaine, indomethacin, and flurbiprofen gel patches are progressing smoothly and are expected to be approved one after another to continue to enrich the percutaneous administration pipeline. (2) API+pharmaceutical excipients: API 24H1 achieved sales revenue of 0.114 billion yuan, with a year-on-year growth rate of +86.7%; pharmaceutical excipients achieved revenue of 91.56 million yuan in the first half of the year, down 1.7% year on year, due to product restructuring. By the end of the reporting period, the company had completed the filing registration of 85 types of raw materials and 92 types of medicinal excipients, forming an integrated development layout of “pharmaceutical formulation+raw drug+pharmaceutical excipient”.

The fee control effect was remarkable, and the net interest rate continued to rise. The company's sales/management/financial expense ratios in the first half of the year were 39.98%, 2.99%, and 0.56%, respectively, compared to -8.74pp, -0.61pp, and +0.56pp, respectively. The drastic optimization of sales expenses mainly benefited from two points: 1) In order to further strengthen the company's ability to control the terminal channel, the company formed a national business team to strengthen the control of sales expenses; 2) The rapid expansion of OTC channels was also conducive to further optimization of sales expenses. The company successfully developed a chain of 350 stores during the reporting period, covering a total of nearly 0.08 stores million family. Cost-side optimization led to a marked increase in net interest rate. In the first half of the year, the company achieved a net interest rate of 20.80%, +4.57pp compared to the previous year.

Profit forecast and investment advice: Taking into account the impact of collection and the optimization of the company's expense ratio, we fine-tune the gross margin and net margin forecast. The company's 2024-2026 revenue is 3.249, 3.908, and 4.69 billion yuan, up 21%, 20% year on year; net profit to mother is 0.534, 0.709, 0.92 billion yuan (previous forecast values were 0.508, 0.684, 0.911 billion yuan), up 45%, 33%, and 30% year over year. Considering the company's continued release of gel paste formulations, the raw materials business is growing steadily, and the company's performance is expected to maintain rapid growth and maintain a “buy” rating.

Risk warning events: risk of new product and process development; risk of product market expansion falling short of expectations; risk of delayed or untimely update of public data information.