Incidents:

On August 26, 2024, the company released its 2024 interim report. In the first half of 2024, the company achieved operating income of 20.455 billion yuan, a year-on-year increase of 0.72%; achieved net profit of 3.189 billion yuan, an increase of 12.76% over the previous year; realized net profit deducted from non-mother of 3.135 billion yuan, an increase of 14.54% year-on-year. Looking at a single quarter, in Q2 2024, the company achieved operating income of 9.681 billion yuan, a year-on-year decrease of 1.18%; achieved net profit due to mother of 1.487 billion yuan, an increase of 13.50% over the previous year; and realized net profit after deducting non-return to mother of 1.445 billion yuan, an increase of 8.26% year-on-year.

The four major business groups are operating steadily, and the pharmaceutical business group has performed well.

In 2024, H1's overall performance achieved steady growth. We believe it was mainly due to the steady operation of the four major business groups, of which the pharmaceutical business group performed well.

1) Pharmaceutical business group: In 2024, the H1 pharmaceutical business group achieved revenue of 4.069 billion yuan, an increase of 9.6% over the previous year. The core products in the Baiyao series maintained steady growth. Among them, the sales revenue of Yunnan Baiyao aerosol exceeded 1.2 billion yuan, an increase of more than 30% over the previous year. The sales revenue of Yunnan Baiyao Ointment and Yunnan Baiyao capsules all maintained good growth. Other brands of traditional Chinese medicine showed impressive growth. Sales revenue of Pudilan anti-inflammatory tablets reached over 100 million, achieving a year-on-year increase of nearly double digits; sales revenue of Gong She-ning capsules increased 36% year-on-year; and sales revenue of pediatric Baotaikang tablets and pain relief capsules increased significantly.

Among plant supplement products, the sales revenue of Qi Xue Kang oral liquid exceeded 100 million, and the sales revenue of Sanqishengbing oral liquid increased by more than 80% over the same period last year.

2) Health products business group: In 2024, the H1 health products business group achieved operating income of 3.144 billion yuan, a slight decrease from the previous year. We estimate that it was mainly affected by the macro consumption environment; it achieved net profit of 1.231 billion yuan, an increase of 1.7% year on year, and gross margin increased 0.7 pct year on year. In the field of oral care, Yunnan Baiyao toothpaste market share continues to lead the country. During the “618” period in 2024, the Yunnan Baiyao oral health brand ranked among the top 1 dental care brands in the entire network (data source: Business Guide). In the field of anti-hair loss and care, H1 Yangyuanqing laundry products achieved sales revenue of 0.195 billion yuan in 2024, an increase of 41% over the previous year. During the “618” period in 2024, it was ranked as the top 1 anti-hair loss shampoo brand by Tmall, and the total GMV of the interested e-commerce Douyin platform broke the 100 million yuan mark in half a year (data source: Business Index).

3) Traditional Chinese Medicine Resources Business Group: In 2024, the H1 Chinese Medicine Resources Business Group achieved external revenue of 0.894 billion yuan, an increase of about 22% year-on-year under the same caliber. Internally, the supply and price stability of the company's strategic varieties continued to be guaranteed, with an average order delivery rate of 99.36% in the first half of the year. In 2024, sales revenue from the H1 natural plant extract business increased 47% year on year; continuing to strengthen pharmaceutical services, Yunnan Baiyao has built and operated the largest herbal medicine center in Yunnan.

4) Provincial pharmaceutical companies: In 2024, H1 Pharmaceutical Company achieved operating income of 12.19 billion yuan, which was basically the same; achieved net profit of 0.29 billion yuan, an increase of 26% year on year; the number of sales orders increased 6.7% year on year, and logistics throughput increased 9.36% year on year. The company actively controlled accounts receivable and achieved phased results; judging from the product classification, the H1 drug distribution business further consolidated its market share in 2024; the non-drug distribution business increased 9% year on year.

Overall quality and efficiency have been improved, and the quality of operation has improved markedly.

In 2024, H1 will further strengthen budget management, risk management and cost awareness, and achieve quality and efficiency in the entire industry chain through digital intelligence. Judging from various financial indicators, we believe that the quality of the company's operations will improve significantly. In 2024, H1's gross sales margin was 29.30%, an increase of 1.75pct over the previous year. We estimate that it was mainly due to business restructuring and fine cost control.

In 2024, H1's net sales margin was 15.59%, up 1.67 pct year on year, and net profit to mother reached a record high for the same period. We estimate that due mainly to fine cost control, H1's sales expenses ratio in 2024 was 11.23%, which was basically the same year on year; in 2024, H1's management expenses ratio was 1.60%, down 0.1 pct year on year. In 2024, H1's operating cash flow was 3.262 billion yuan, up 44.84% year on year; weighted average net asset income was 7.93%, up 0.76 pct year on year; monetary fund balance was 14.72 billion yuan, up 3.53% from the beginning of the period.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 39.667 billion yuan, 41.449 billion yuan, 43.327 billion yuan, and net profit to mother of 4.593 billion yuan, 5.07 billion yuan, and 5.537 billion yuan, respectively. The corresponding PE valuations are 20.9 times, 19.0 times, and 17.4 times, respectively. We gave the company a buy-A investment rating, with a target price of 64.25 yuan for 6 months, which is equivalent to a dynamic price-earnings ratio of 25 times in 2024.

Risk warning: raw material price fluctuation risk; pharmaceutical industry policy change risk; macro-consumption sentiment risk.