Key points of investment

I am optimistic that the sales volume of Losol will continue to grow and that the release of ketoprofen gel patches will accelerate in the future, which will establish a steady increase in the company's revenue. Driven by the implementation of mining, marketing reforms, and off-campus disbursements, I am optimistic that the company's net interest rate will continue to rise.

Performance: Steady revenue and high profit growth

The company announced 2024H1 results: the company achieved revenue of 1.366 billion yuan (YoY +12.19%), net profit to mother 0.284 billion yuan (YoY +43.77%), net profit of 0.255 billion yuan after deducting non-return to mother (+43.24% YoY).

2024Q2: The company achieved revenue of 0.775 billion yuan (YoY +8.31%), net profit of 0.158 billion yuan (YoY +31.24%), and net profit of 0.149 billion yuan after deduction (+36.52% YoY).

Growth analysis: Rapid release outside of hospital, ketoprofen elasticity can be expected 1) Formulation sector: 2024H1 achieved revenue of 1.086 billion yuan (+7.52% year-on-year). We believe that the slowdown in revenue growth was mainly affected by successive licensing of loxoprofen sodium gel patch collection. View by product:

① Loxoprofen sodium gel paste: 2024H1 achieved sales of 0.686 billion yuan. Due to the gradual expansion of the scope of collection and licensing, revenue decreased by 1.85% year on year, but overall sales volume increased by 40.81% year on year. In addition, loxoprofen sodium gel patches were quickly released outside the hospital, achieving sales revenue of 0.106 billion yuan, a strong increase of 330% over the previous year.

Based on “collection for price” and “the out-of-hospital market is expected to continue to release volume,” we are optimistic that sales of loxoprofen sodium gel patches will continue to grow.

② Ketoprofen gel patch: Currently in the early stages of release, 2024H1 achieved sales of 21.68 million yuan. Based on the fact that this variety has been included in the medical insurance catalogue and is an exclusive variety, we believe that sales of this variety will continue to grow rapidly in the future.

③ New paste product: According to the company's customs activity record sheet, sales of anti-inflammatory and analgesic cream are expected to begin in October. According to estimates on the time of submission of the NDA, we expect indomethacin gel patches and flurbiprofen gel patches to be approved for marketing in 2025. The company will gradually form a matrix of topical analgesic paste products to establish future growth.

2) Raw materials sector: achieved revenue of 0.256 billion yuan (+36.08% year over year). Among them, sales of APIs reached 0.114 billion yuan (+86.68% YoY); sales of pharmaceutical excipients achieved sales of 91.5595 million yuan (-1.69% YoY), and sales of plant extracts reached 50.2598 million yuan (+48.50% YoY). According to the company's 2024 interim report, the company already has 78 types of raw materials, 81 types of excipients, and more than 30 varieties of APIs under development, laying the foundation for sustainable growth in the company's raw materials sector.

Profitability analysis: The increase in net interest rate benefits from collection+marketing transformation+out-of-hospital sales volume. I am optimistic about the sustainability of 2024H1: gross profit margin 73.14% (-4.60pct year on year), net sales margin 20.8% (+4.57pct year over year).

Looking at the cost ratio, the sales expense ratio is 39.98% (year-on-year -8.74pct), and the R&D expense ratio is 8.34% (year-on-year +0.87pct).

2024Q2: Gross profit margin 73.52% (YoY -6.2pct), net sales margin 20.44% (YoY +3.57pct).

Looking at the cost ratio, the sales expense ratio was 39.59% (YoY -10.94pct), and the R&D expense ratio was 9.43% (YoY +2.66pct).

The company's sales expenses rate dropped significantly. According to the company's customs investment activity record table, there are three main factors:

① Loxoprofen sodium gel patches have been implemented one after another in collection areas, reducing some sales expenses; ② the company's marketing model has been transformed, and the cost rate has been effectively controlled; ③ the share of the out-of-hospital market has increased. The above factors are all long-term, and Rosso's share of out-of-hospital revenue is expected to continue to increase in the future, so we are optimistic about the continuation of the increase in the company's net interest rate.

Analysis of business quality: Under the convergence of businesses, I am optimistic that the 2024H1 company will achieve a net operating cash flow of 0.418 billion yuan (+111.71% year over year), a net operating cash flow/net profit of 1.47, an increase of 0.47 over the previous year, and a accounts receivable turnover ratio of 2.80, an increase of 0.22 over the previous year. According to the company's customs investment activity record table, the above measures have effectively improved the company's operating efficiency and cash flow situation by promoting commercial consolidation and strengthening centralized distribution and supplier negotiations.

Profit forecasting and valuation

We forecast that in 2024-2026, the company's revenue will be 3.11/3.665/4.373 billion yuan, EPS will be 1.04/1.36/1.73 yuan, respectively, and the 2024/8/30 closing price will correspond to 21 times the 2024 PE. The “buy” rating was maintained in view of the continued dosage of Losol, the flexibility of ketoprofen's future volume, and the sustainability of the company's net interest rate increase.

Risk warning

Risk of product sales falling short of expectations, risk of R&D failure, risk of increased industry competition