Performance was under slight pressure, and the industrial sector grew steadily. The company achieved operating income of 4.372 billion yuan in the first half of 2024, down 0.5% year on year; net profit to mother 0.662 billion yuan, down 6.3% year on year; net profit after deducting non-return to mother of 0.735 billion yuan, up 6.3% year on year. By sector, the company's pharmaceutical industry revenue was 3.896 billion yuan, up 4.6% from the same period last year. Among them, the revenue from the Chinese medicine sector was 3.121 billion yuan, up 3.5% from the same period last year, maintaining steady growth.

The cost rate is basically stable, and profitability is steadily improving. The company achieved a gross profit margin of 67.5% in the first half of 2024 and a net interest rate of 16.8% after deduction, an increase of 1.3 and 1.1 pct, respectively, over the same period last year. The decline in net profit to the mother was mainly due to the loss of changes in the fair value of financial assets held by the company during the reporting period higher than the same period last year. The increase in net profit after deducting non-return to mother was mainly due to the increase in profit due to the increase in industrial revenue in the current period. On the cost side, the company's sales expense ratio, management expense ratio, and R&D expense ratio for the first half of 2024 were 33.6%, 3.5%, and 8.5%, respectively, with a change of less than 0.5 pct compared to the same period last year.

China Resources 39 will enter the market, and the product pipeline is progressing in an orderly manner. On August 4, Tianshili Group and its co-actors signed a “Share Transfer Agreement” with China Resources 39 to transfer 28% of the company's shares to China Resources 39. If successfully implemented, the actual controller of the company will be changed to China Resources. China Resources 39 and Tianshili complement each other. Through China Resources 39's support in management, marketing and policy resources, the company will be able to enhance its competitiveness in more dimensions. In the first half of the year, the company invested 0.47 billion yuan in R&D, an increase of 3.50% over the previous year. The product line covered the R&D pipeline for 101 products under development, including 40 Class 1 innovative drugs, and 25 in clinical phase II and phase III: 2 classic Chinese medicine, loquat lung cleansing drink and Wenjing soup, are in the declared production stage and have passed drug registration, development and production site verification; 19 innovative traditional Chinese medicine products are in clinical phase II and phase III research stages.

Considering the effects of procurement and price fluctuations of pharmaceutical raw materials, we lowered the company's 24-25 profit forecast and predicted that the company's earnings per share for 2024-2026 would be 0.79/0.88/0.96 yuan (the original forecast value for 2024-2025 was 0.85/0.93 yuan, respectively). According to comparable companies, we believe that the current reasonable valuation level of the company is 19 times the price-earnings ratio of 2024, and the corresponding target price is 15.01 yuan, maintaining the purchase rating.

Risk warning

Risk of collection exceeding expectations, risk of equity transfer implementation progress falling short of expectations, risk of sales falling short of expectations, risk of developing new products falling short of expectations, etc.