Key points of investment

Incident: The company announced that in the first half of 2024, the company achieved operating income of 1.366 billion yuan (+12.19%, indicating year-on-year growth rate, same below), net profit of 0.284 billion yuan (+ 43.77%) to mother, net profit of 0.255 billion yuan (+ 43.24%) after deducting net profit not to mother. In the 2024Q2 quarter, the company achieved operating income of 0.775 billion yuan (+8.31%), net profit due to mother 0.158 billion yuan (+31.24%), and net profit not attributable to mother of 0.149 billion yuan (+36.52%). The performance was in line with expectations.

The continuous release of paste products ensures the company's profit growth. 2024H1, the company's pharmaceutical product revenue increased by 7.52% year on year, and the revenue growth rate has slowed down. We believe that the number of provinces where the main core product loxoprofen sodium gel patch is being collected has increased, and the revenue growth rate has had an impact. However, in the 2024Q1 and 2024Q2 quarters, the company achieved a year-on-year increase in net profit of 63.44% and 31.24%, respectively, and net profit without return to the mother increased by 53.90% and 36.52% year-on-year, and still achieved high profit growth in the second quarter. We believe that loxoprofen sodium gel paste, which was mainly due to the company's core profit contribution, was more conducive to admission to the hospital after collection, and increased volume after collection, contributing to the high growth rate of the company's main profit.

The company's sales expenses rate decreased significantly, and the net sales margin increased markedly. 2024H1, the company's gross sales margin and net sales margin were 73.14% (-4.6pp) and 20.80% (+4.57pp), respectively. The decline in overall gross margin was mainly due to the continuous collection of loxoprofen sodium gel patches in more provinces and price declines, which led to a 4.09pp year-on-year decrease in gross margin of 2024H1 pharmaceutical preparations. At the same time, due to cost ratio optimization, the company's overall net sales margin for 2024H1 increased dramatically. The sales expense ratio of the 2024H1 company was 39.98% (-8.74pp), and the sales expense ratio of 2024Q1 and 2024Q2 was 40.5% (-5.65pp) and 39.59% (-10.94pp), respectively. The sales expenses dropped significantly, mainly due to the decline in sales expenses in the province after collection, the reform and optimization of the company's marketing model, and the increase in the share of out-of-hospital revenue, which led to a significant reduction in the company's sales expenses ratio. At the same time, the company's 2024H1 management expense ratio is 2.99% (-0.61pp). Through fine management, the management fee rate is effectively controlled. We believe that with the rapid growth in the scale and share of the company's external revenue, and the optimization of the marketing model, there is still room for decline in the company's expense ratio, and the company's profit performance is expected to maintain rapid growth.

Profit forecast and investment rating: Maintain the estimated 2024-2026 net profit of the company to be 0.512/0.693/0.865 billion yuan, respectively, and the PE corresponding to the current market value is 21/16/13 times. Considering the company's rich product pipeline, products will be approved and listed one after another starting in 2024 to ensure long-term growth in the company's performance, and there is still room for cost ratio optimization, and profit performance is expected to continue to grow at a high rate. Maintain a “buy” rating.

Risk warning: Risk of product development failure, risk of new product promotion falling short of expectations, increased risk of market competition.