Incident: The company recently released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 4.604 billion yuan, a year-on-year decrease of 32.19%; net profit after deducting 0.505 billion yuan, a year-on-year decrease of 67.24%; Q2 achieved revenue of 2.082 billion yuan, a year-on-year decrease of 27.10%; and deducted non-net profit of 0.212 billion yuan, a year-on-year decrease of 41.49%.

Sales of respiratory products were under pressure in the first half of the year: by product segment, 1) 24H1 sales revenue of cardiovascular products was 2.313 billion yuan, -7.86% year over year; 2) respiratory system 24H1 sales revenue of 1.284 billion yuan, or -58.42% year over year, mainly due to a drop in demand due to high base and high social inventories in the same period last year; 3) sales revenue of other patented 24H1 was 0.16 billion yuan, -42.02% year over year.

The product hierarchy continues to be rich, and evidence-based medical evidence continues to accumulate: 1) Lianhua Cough Tablets have changed from prescription drugs to non-prescription drugs, and drug accessibility has further improved, which is expected to have a positive impact on product sales; 2) Bazi Kidney Supplement capsules continue to accumulate evidence-based medical data on overall aging and the anti-aging effects of various systems such as the nervous system, motor system, and cardiovascular system; 3) In 2024, Shenling Blue Capsules were listed as recommended drugs by the “Expert Consensus on the Long-term Use of Traditional Chinese and Western Medicine for Breast Cancer”; 4) The product echelon continues to be rich, and astragalus anti-nasal tablets continue to be rich. Chai Huang choleretic capsules have been declared clinically marketed, and Luopanjiao tablets have been declared for clinical use , Pediatric Lianhua Qinggang Granules are in clinical phase III, and four drugs, including Lianhua Qinggang Granules, are in clinical phase II.

Investment proposal: We expect the company to achieve operating income of 10.628/11.862/13.987 billion yuan and net profit to mother of 1.531/1.734/1.973 billion yuan in 2024-2026. The corresponding PE was 16.48/14.55/12.79 times, respectively, maintaining the “buy” rating.

Risk warning: Product sales fall short of expectations, clinical research and development progress falls short of expectations, industry policy risks.