Key points of investment:

Profit more than doubled, H1 profit exceeded 23 for the whole year

H1 performance: The company's 24H1 achieved operating income of 5.96 billion yuan, a year-on-year decrease of 7.5%; net profit to mother was 0.72 billion, an increase of 108.3% year on year; realized net profit without deduction of 0.68 billion yuan, an increase of 112.1% year on year.

Q2 single-quarter results: The company achieved operating income of 2.84 billion yuan in 24Q2, a year-on-year decrease of 6.3%; net profit to mother of 0.39 billion, an increase of 133.7%; achieved net profit without deducted income of 0.36 billion yuan, an increase of 135.9% year-on-year

The performance of APIs was strong, and the API and intermediates sector was under pressure in the context of collection in the formulation sector: 24H1 achieved sales revenue of 2.69 billion yuan, an increase of 7.4% over the previous year, accounting for 45.1% of the current revenue. 6-APA, an upstream intermediate in the penicillin series, was prioritized into the production of downstream high-value-added products for foreign sales. Sales of ampicillin, amoxicillin, and clavulanic acid products increased by 805.8%, 93.8%, and 34.0% year-on-year respectively. The sharp increase in sales led to a marked increase in revenue.

The gross margin of the pharmaceutical intermediates and APIs business segment was 32.3%, an increase of 11 percentage points compared with the same period last year. The main reasons for the increase in gross margin are: 1) the sharp increase in the sales scale of some high-margin products; 2) the reduction in the procurement price of raw materials through strategic planning; 3) the continuous promotion of process optimization and upgrading of some key API products, which led to a year-on-year decline in costs.

Formulation sector: 24H1 achieved sales revenue of 3.11 billion yuan, a year-on-year decrease of 14.9%. Short-term pressure was mainly due to linked price reduction in procurement and the “four same” drug price linkage sectors. The gross margin decreased 6.4 percentage points year on year, and the overall sales expenses ratio decreased 7.4 percentage points year on year. Under pressure, the operating level bucked the trend. By sector: 1) Anti-infection: revenue scale decreased by 5.5%, and sales of key products continued to increase year on year; 2) nervous system: revenue increased slightly year over year, with sales of injectable remifentanil hydrochloride and sufentanil citrate injections increasing 13.8% and 76.1% year on year, respectively; 3) respiratory system: revenue scale increased 5.5% year on year.

In the first year of the Sinopharm merger and acquisition, book monetary capital was sufficient, and there was support for epitaxial investment mergers and acquisitions.

By the end of June 2024, the company's total assets were 19.97 billion yuan and total liabilities were 4.88 billion yuan; the company's balance ratio gradually declined from 48.72% in 2018 to 24.4% in 2024H1. In 2023, the company's book capital was 6.45 billion yuan, and sufficient cash on hand provided support for the company's outward investment mergers and acquisitions.

It is expected that the company will actively expand the industrial chain, improve the business layout, and increase the epitaxial industrial layout.

Profit forecasting and investment advice

We forecast the company's revenue for 2024/2025/2026 to be 12.441/13.225/14.156 billion yuan, respectively, with a growth rate of 3%/6%/7%. The company's net profit for 2024/2025/2026 was 1.154/1.344/1.535 billion yuan, respectively, with a growth rate of 67%/17%/14%, keeping the previous forecast unchanged. Considering that the company is a unified chemical industry platform under the Sinopharm Group, it has the advantage of engineering and medical collaboration within the Sinopharm Group, and the national reform is expected to continue to improve the company's performance and maintain a “buy” rating.

Risk warning

Prices of antibiotic raw materials and intermediates have declined, and the cost reduction and efficiency of the national reform fell short of expectations.