Core views

The company's 2024H1 revenue side remained stable, driven by the core sector. Net profit to mother declined due to changes in the fair value of the company's financial assets, and the continuous increase in the share of revenue in the industrial sector with strong profitability led to an increase in non-net profit growth. The company accelerates the promotion of indications for the Dandi-Sugar Network and actively promotes the entry guidelines and consensus of core products; the R&D pipeline is progressing efficiently. 25 models are already in phase II and III clinical research stages, continuing to consolidate the leading position of modern traditional Chinese medicine. The company's semi-annual profit distribution plan proposes to distribute cash dividends of 0.388 billion yuan, accounting for 58.65% of net profit returned to mother for the half year, and continue to give back to shareholders. Looking ahead to the whole year, the core sector is expected to drive steady growth in the main business.

occurrences

The company released the 2024 semi-annual report and semi-annual profit distribution plan. On August 23, the company released the 2024 semi-annual report. 24H1 realized operating income, net profit attributable to mother, and net profit after deduction of 4.372 billion yuan, 0.662 billion yuan, and 735 million yuan, respectively, with year-on-year increases of -0.46%, -6.34% and 6.31%, respectively.

Q2 achieved operating income, net profit to mother, and net profit after deduction for a single quarter of 2,323 billion yuan, 0.367 billion yuan, and 441 million yuan, respectively, up 0.49%, -16.76%, and 7.05% year-on-year, respectively. The results were in line with our previous expectations. According to the 2024 semi-annual profit distribution plan, the company plans to distribute cash dividends of 2.6 yuan (tax included) for every 10 shares, for a total of 0.388 billion yuan, accounting for 58.65% of the net profit attributable to mother in the semi-annual consolidated statement.

Brief review

Performance is in line with expectations, and the main business is growing steadily

24H1 achieved operating income of 4.372 billion yuan, a year-on-year decrease of 0.46%; net profit to mother of 0.662 billion yuan, a year-on-year decrease of 6.34%; net profit after deducting non-return to mother of 0.735 billion yuan, an increase of 6.31% year-on-year. Q2 achieved revenue of 2.323 billion yuan in a single quarter, up 0.49% year on year; net profit to mother was 0.367 billion yuan, down 16.76% year on year, after deducting net profit of not to mother of 0.735 billion yuan, up 6.31% year on year. The revenue side remained stable, driven by the core sector. The decline in net profit due to losses due to changes in the fair value of financial assets held by the company was higher than in the same period last year. The increase after deducting non-net profit was mainly due to the continuous increase in the share of revenue in the industrial sector where the company's profitability is strong. Overall, the company's performance was steady under the influence of external environmental factors and base figures in the industry, and the performance was in line with our previous expectations.

The industrial sector remains stable, and the commercial sector continues to be under pressure

Looking at the 24H1 segment: 1) Pharmaceutical industry sector: 24H1 achieved revenue of 3.896 billion yuan, a year-on-year increase of 4.55%, gross margin of 71.80%, a year-on-year decrease of 1.01 percentage points. Among them, the three core business segments of traditional Chinese medicine, chemical pharmaceuticals, and biopharmaceuticals achieved revenue of 3.121 billion yuan (+3.53%), 0.631 billion yuan (+12.57%), and 0.107 billion yuan (-7.75%), respectively, due to environmental factors outside the industry The industrial sector has achieved steady growth, driven by traditional Chinese medicine and chemical pharmaceuticals. 2) Pharmaceutical business sector: 24H1 achieved revenue of 0.454 billion, a year-on-year decline of 28.08%, and gross margin of 31.66%, an increase of 4.0 percentage points over the previous year. The company's pharmaceutical business is mainly a retail chain business. Currently, it has chain pharmacies in regions such as Liaoning Province, Tianjin City, Shandong Province, etc. The company has signed a “Stock Acquisition Agreement Termination Agreement” with Shu Yu Minmin. It is expected that the termination of the share transfer will not affect the normal production and operation of the company.

Accelerate the promotion of indications for the core product, and actively promote the entry of core products into the guidelines and consensus. On the basis of compound salvia pill forming a cardiovascular brand advantage, the company continued to lay out multi-level product portfolios, continuously strengthened large-scale secondary development and innovative traditional Chinese medicine research and development, and continuously strengthened product life cycle management. With compound salvia pills, it has driven a series of leading brand products such as serum nourishing brain pellets (pills) and Qi Shen Yi Qi Di Pills, etc., to build a modern traditional Chinese medicine system focusing on cardiovascular and cerebrovascular use. 24H1 actively promotes core products into medication guidelines and expert consensus in related disease treatment fields. A total of 7 varieties have entered 13 consensus and guidelines. In terms of modern traditional Chinese medicine, the three varieties of Compound Danshen Drops, and Qi Shenyi Qi Drops are included in the “Cognitive Clinical Diagnosis and Treatment Guidelines for Coronary Heart Disease Combined with Depression and Anxiety”. Compound Danshen Droplets entered the “Expert Consensus on Diabetic Retinopathy Screening Workflow and Management Standards in Community Medical Institutions (2023 Edition)”, “National Grassroots Diabetic Neuropathy Diagnosis and Treatment Guidelines (2024 Edition)”, and the “Expert Consensus on the Diagnosis and Treatment of Chronic Cerebral Ischemia with Traditional Chinese and Western Medicine”. National Heart Failure Guide 2023, China “Heart Failure Diagnosis and Treatment Guidelines 2024”, “Guidelines for Primary Diagnosis and Treatment of Heart Failure in China (2024)”, and “Chinese Expert Consensus on Standardizing the Construction of Double Heart Outpatient Clinics”. As the company accelerates the promotion of compound salvia pill and actively carries out scenario-based marketing of sugar net indications, it will help further open up the Danji market space. The entry of core product guidelines and expert consensus will advance the progress of clinical research and the transformation of results, and continue to bring incremental contributions.

The R&D pipeline is progressing efficiently, continuing to consolidate the leading position of modern traditional Chinese medicine. 24H1 continues to step up R&D and innovation, and the R&D pipeline is being promoted efficiently. Currently, it has a R&D pipeline covering 101 products under development through the “four-in-one” R&D model, including 40 Class 1 innovative drugs, 35 are in clinical trials, and 25 are already in clinical phase II and III research; 2 classic traditional Chinese medicine loquat lung cleansing drinks and Wenjing soup are in the registration production stage and have passed drug registration, development and production site verification; including anshen drops, and back pain pills Qingjutsu Nineteen innovative traditional Chinese medicine products, including granules, Antewei granules, and tangerine lacticunin capsules, are in phase II and III clinical research stages. In terms of international research and development, T89 has entered clinical phase II for the treatment of chronic stable angina pectoris and prevention of acute plateau syndrome (AMS).

The company's “Traditional Chinese Medicine Internationalization (Belt and Road) Registration Path and Key Technology” was selected for the 2023 “Science and Technology Innovation China” pilot technology list. We believe that as the company adheres to integrity innovation and self-innovation, steadily increases the coverage of core varieties, and combines production and investment to cultivate new growth momentum, it is expected that it will continue to stabilize the company's leading position in modern traditional Chinese medicine, and we are optimistic that honest innovation will lead the company's high-quality development.

Profitability is rising steadily, and the quality of operations remains healthy

2024H1, the company's comprehensive gross margin was 67.46%, +1.28 percentage points year on year, mainly due to the increase in revenue share of the highly profitable industrial sector; the sales expense ratio was 33.62%, +0.02pp; the management expense ratio was 3.46%, -0.12 pp, which remained stable; the R&D expense ratio was 8.47%, +0.46 pp. The main reason was that the company continued to increase investment in R&D and accelerate the modern R&D process of traditional Chinese medicine; the net cash flow from operating activities was 0.887 billion yuan, the same Compared to +5.5%, the net cash flow from operating activities in Q2 in a single quarter was +76.9%, and the cash flow situation was good. Other financial indicators are generally normal.

Looking ahead to the whole year: The core sector is expected to drive the main business to achieve steady growth throughout the year. In the Chinese medicine sector, as the company accelerates the promotion of compound Danshen Dipping Pills, and carries out scenario-based marketing of sugar net indications, it will help further open up Dandi market space. I am optimistic that the 24-year Sugar Net Indication promotion will continue to bring incremental contributions to the core exclusive variety of compound salvia tablets. Other core product guidelines and consensus are being actively promoted. The overall Chinese medicine sector is expected to continue the steady growth trend driven by the three basic pharmaceutical products; in the chemical sector, Tiqing will continue to adjust the price of the three basic pharmaceutical products The impact gradually weakens, and new ones are superimposed The product layout continues to improve, and it is expected that product sales will gradually recover in 24 years; in the biopharmaceutical sector, although product sales are under pressure in the short term due to the impact of the competitive environment outside the market, as Puyuk moves from the negotiation catalogue of the National Health Insurance Catalogue to the regular Class B catalogue, expanding market space by improving market access. At the same time, Phase III verification tests are progressing rapidly, and Puyouke is still expected to recover sales in the next few years, driven by new indications. Overall, the company's main business is expected to maintain a steady growth trend driven by the core sector in '24.

Profit forecasting and investment ratings

Excluding the impact of non-recurring profit and loss events such as fluctuations in the company's asset prices, the company's main business operations remained steady. Looking forward to the future, the company will continue to innovate R&D pipelines and actively expand new indications around the three major disease fields of cardiovascular, digestive metabolism, and cancer. As the company accelerates the promotion of Dandisan Sugar Network indications, the approval and marketing of innovative products one after another, and the progress of new indications for the biopharmaceutical Puyouke, it is expected that the company's main business performance will continue to grow steadily in the future. We expect the company to achieve operating income of 9.104 billion yuan, 9.651 billion yuan and 10.332 billion yuan respectively from 2024 to 2026, and net profit to mother of 1.168 billion yuan, 1.283 billion yuan, and 1.415 billion yuan respectively, with year-on-year increases of 9.1%, 9.8%, and 10.3%, respectively, maintaining the “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment increases. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profit; 2) Product price reduction risk (product price reduction exceeds expectations due to interprovincial procurement alliances): Product price reduction due to collection and direct reduction in hospital market share, which in turn will directly affect the company's overall business situation and profit level; 3) Risk of price increase in raw materials and power costs: The cultivation cycle of traditional Chinese medicine is long, and fluctuations in the price of raw materials required by the company will cause costs to rise, which in turn will affect the company's overall profit; 4) The Chinese medicine policy environment is unstable: The relevant environment is not completely stable. If relevant policies are introduced in the future, it may cause the market to become chaotic and affect the company's business conditions.