Incident: The company released its 2024 semi-annual report, achieving operating income, net profit to mother, and net profit excluding non-return to mother of 20.455/3.189/3.135 billion yuan, +0.72%/12.76%/14.56% YoY; net operating cash flow of 3.262 billion yuan, +44.84% YoY; EPS (basic) 1.79 yuan. The results are in line with market expectations.

Comment:

1H24 revenue grew steadily, promoting quality and efficiency throughout the chain. 24Q1-Q2's revenue was 10.774/9.681 billion yuan, +2.49%/-1.18%; net profit to mother was 1.702/1.487 billion yuan, +12.12%/13.50% YoY; net profit excluding non-return to mother 1.69/1.445 billion yuan, +20.51%/8.26% YoY, with steady growth in business performance. The profit side growth rate of 1H24 was significantly higher than that of the revenue side, due to the optimization of the revenue structure and the increase in gross margin. By industry, 1H24 industrial revenue was +2.05% year over year, commercial revenue was -0.23% year over year; industrial gross margin was +3.10pp year over year, and commercial gross margin was +0.28pp year on year. The results of improving industrial quality and efficiency were remarkable. In terms of profitability, 1H24 gross margin was +1.74pp to 29.30% year over year, the period expense ratio was -0.08pp to 12.92% year over year, and net profit margin was +1.66pp to 15.59% year over year. Industrial cost reduction and revenue structure optimization drove the increase in profitability. The number of 1H24 inventory turnover days was 77 days, 14 days shorter than the previous year, and operational efficiency improved significantly. 1H24 net operating cash flow was +44.84% year-on-year, and accounts receivable management was strong.

The main business focuses on structural optimization, and the four major business groups achieve high-quality development. By business type, 1H24 achieved revenue of 43.57/3.153/0.809/11.786 billion yuan in revenue of 43.57/3.153/0.809/11.786 billion yuan, compared with +11.3%/-5.1%/+9.2%/-0.2% (or slightly different from the previous year's statistical caliber), and the revenue performance of pharmaceutical and traditional Chinese medicine resources was good. In the pharmaceutical division, the core products of the Baiyao series grew steadily. Among them, the revenue of Baiyao aerosol in Yunnan exceeded 1.2 billion yuan, an increase of more than 30% over the previous year; other brands of traditional Chinese medicines, such as Pudilan anti-inflammatory tablets and Gong She-ning capsules, saw impressive growth, thanks to deep channel cultivation, the “Universal Medicine for Thousands of Households” project offline, and the online channel is expanding vigorously.

The Health Products Division has increased gross margin and net margin through digitally driven and lean operations. The leading position of toothpaste is stable. Yangyuanqing's hygiene product revenue is 0.195 billion, YOY is +41%, and the penetration rate continues to increase. The Traditional Chinese Medicine Resources Division continues to guarantee the stable supply and price of the company's strategic varieties, and revenue from natural plant extracts is +47% YOY. The net profit of provincial pharmaceuticals is YOY +26%, the results of improving quality, reducing costs and increasing efficiency are outstanding, and accounts receivable management is effective.

The 2024-2028 strategic plan was implemented to lead medium- to long-term development. With the strategic goal of “promoting Centennial Baiyao to become a leading domestic and world-class modern pharmaceutical industry group, achieve reasonable growth in scale and high quality development with continuous optimization of industrial structure and product structure”, the company will firmly continue to deeply cultivate the roots of the “medicine” industry, push all businesses to focus on the company's superior fields in the health industry, continuously strengthen its leading position in the industry, and scientifically, prudently and effectively promote the construction of new business growth points while continuously improving its core competitiveness. In the short term, through contextual development and epitaxial development of two-wheel drive, expand and strengthen high-quality traditional Chinese medicine, improve new and healthy lives, stabilize and improve new circulation in the region, make up for the lack of endogenous growth, and rapidly build a health industry system. In the medium to long term, it is a “chain leader” enterprise that does a good job in the high-quality development of Yunyao resources, a “leading” brand for managing all fields of injury and pain, a “best” partner for quality of life and life ecosystem services, and a “leading” enterprise for life and health value services. Establish a healthy and sustainable industrial portfolio system to promote the achievement of the company's strategic goals.

Profit forecasting, valuation and rating: The company focuses on its core business, improves quality and efficiency throughout the chain, and strategically leads medium- to long-term development. It combines contextual and epitaxial development, and has broad future prospects. Considering the significant results of cost reduction and efficiency, we slightly raised our 24-26 net profit forecast to 46.80/51.92/5.713 billion yuan (up 3%/5% from the previous forecast). The current stock price corresponds to PE of 20/18/17 times, maintaining the “increase” rating.

Risk warning: Pharmaceutical policy risks; consumption recovery falling short of expectations; risk of R&D failure.