Incident: The company released its 2024 semi-annual report: 2024H1 achieved revenue of 2.811 billion yuan, -8.6% year over year, realized net profit to mother 0.342 billion yuan, -19.5% year over year, and achieved deduction of non-net profit of 0.316 billion yuan, or -12.4% year over year. Looking at Q2 alone, 2024Q2 achieved revenue of 1.45 billion yuan, a year-on-year ratio of -18.1%, realized net profit to mother of 0.098 billion yuan, or -56.1% year-on-year, and realized deduction of non-net profit of 0.084 billion yuan, or -59.7% year-on-year.

Profit analysis: The share of medical and aesthetic medicine increases and optimizes gross profit margins, putting pressure on performance during the management transformation period. The 2024H1 gross profit margin was 74.52%, +0.7 pct year on year, mainly due to the increase in the share of medical and aesthetic businesses with high gross profit; the net profit margin was 12.11%, -1.6 pct year on year. On the cost side, the 2024H1 sales/management/ R&D cost rates were 41.93%/8.77%/7.13%, respectively, compared to -4.3/+2.1/+1.1 pct. The main reason is that cosmetics business operations have tightened control over sales expenses, and the changes have increased the management cost rate in the short term. Overall, the pressure on performance is mainly due to the fact that management changes have caused a series of expenses affecting short-term profits and losses in the short term. At the same time, investment in R&D and innovation businesses continues to grow. The functional skincare business is inevitably affected in the short term due to the tightening of business measures during a period of management change.

Business update: The medical and aesthetic business grew rapidly after the transformation, and the cosmetics business is still in a period of adjustment. The functional skincare products/medical terminal/ingredients/functional food business achieved revenue of 13.81/0.743/0.63/0.029 billion yuan respectively, or -29.74%/+51.92%/+11.02%/-11.23% compared with the same period last year. 1) Medical terminals: After deepening the effects of transformation, the medical and aesthetic business achieved a steady increase in revenue and a steady decline in cost rates. Dermatological medical products achieved revenue of 0.555 billion yuan, +70.14% over the same period last year. Among them, the revenue of the company's differentiated advantage category Microcrosslinked Runzhi Doll Needle increased by more than 200% year on year. In the research pipeline, the company's three types of devices, “Sodium Hyaluronate Complex Solution for Injection”, were approved by the NMPA for listing in July 2024. The three types of organic water light products have entered the registration stage and are expected to become the first batch of compliant water light indication products. The self-developed three-class collagen terminal product is expected to enter the clinical stage in the second half of 2024. At the same time, the company has obtained 7 medical device registration certificates internationally and continues to advance the internationalization of medical and aesthetic business. 2) Raw materials: The sales revenue of raw materials in both domestic and international markets increased. Among them, the company's sales revenue of exported raw materials was 0.328 billion yuan, an increase of 19.30% over the previous year, accounting for 52.06%. The gross margin was 70.71%, +0.51 pct year on year. Among them, the gross margin of pharmaceutical-grade hyaluronic acid raw materials was 87.54%, which remains stable and is at a high level in the industry. 3) Functional cosmetics:

Major brands were adjusted in stages during the transformation. Runbaiyan completed the iterative layout of the two major product lines. Muscoactive launched new essences and creams for oily sensitive and acne-prone skin. At the same time, the major product “Brown Rice Water” was fully upgraded. Mibel's “Blue Bandage” series accounted for more than 60% of sales revenue.

Investment advice: As a leading hyaluronic acid company, the company's raw material & product development capacity reserves support pipeline expansion in the long term, and the skincare sector is expected to reach an inflection point after adjustment. We expect the company's 2024-2026 revenue to 6.175/7.112/8.305 billion yuan, and net profit to mother of 0.746/0.886/1.04 billion yuan. The corresponding PE was 34/29/24 times, respectively, and adjusted to the “gain” rating.

Risk warning: New product development and marketing fall short of expectations, industry regulatory risks, and increased industry competition.