Incident: In the first half of 2024, Liuyao Group achieved revenue of 10.642 billion yuan, an increase of 2.88% year on year; net profit to mother of 0.464 billion yuan, an increase of 4.79% year on year.

The pharmaceutical wholesale business slowed down due to policies: in the first half of 2024, the company's wholesale business achieved operating income of 8.438 billion yuan, a year-on-year decrease of 0.04%, accounting for 79.64% of revenue; realized net profit to mother of 0.295 billion yuan, an increase of 3.31% year on year, and net profit to mother accounted for 63.61%. The slowdown in the growth rate of the wholesale business is mainly due to the normalization of collection and procurement, the expansion of medical insurance payments (DRGs), and stricter industry compliance regulations, which have had a certain impact on the amount of medication used and the drug usage structure at the hospital side, putting pressure on the pharmaceutical distribution market.

The retail business grew steadily: In the first half of 2024, the company's retail business achieved revenue of 1.586 billion yuan, up 18.29% year on year, accounting for 14.97% of revenue; net profit to mother was 68.8295 million yuan, up 8.82% year on year, accounting for 14.83% of revenue. As of the first half of 2024, Gui Zhongda Pharmacy has 869 pharmacies, including 185 DTP pharmacies (including courtyard stores). It is expected that as the proportion of general community pharmacies increases, the profitability of the retail business is expected to further increase.

The layout of the entire Chinese medicine industry chain: In the first half of 2024, the pharmaceutical industry achieved revenue of 0.562 billion yuan, up 7.28% year on year, accounting for 5.30% of revenue; realized net profit of 97.8718 million yuan, up 7.86% year on year, accounting for 21.08% of net profit to mother. As of the first half of 2024, Xianju Traditional Chinese Medicine Technology has been able to produce more than 1,100 processed tablets, and will launch more refined tablet products, medicinal and dietary products, cosmeceutical products, etc. As of the first half of 2024, the company's traditional Chinese medicine formula has developed more than 700 hospitalized customers, including more than 250 customers in Guangxi (nearly 100 hospitals above level II) and more than 470 customers outside Guangxi.

Investment advice: Distribution business growth is slowing down, waiting for the industry to improve. We expect the company to achieve operating income of 22.269/24.097/26.295 billion yuan and net profit to mother of 0.938/1.046/1.172 billion yuan in 2024-2026.

The corresponding PE was 6.72/6.03/5.38 times, respectively, maintaining the “gain” rating.

Risk warning: risk of increased market competition; risk of profits falling short of expectations from new business or investment projects; risk of accounts receivable management