Core views

The revenue side of the company's 24H1 main business declined slightly, and the profit side performed well. The performance was in line with previous forecast expectations. The API intermediates business performed well, which is clearly driven by the company's performance; revenue from the formulation business is under pressure in the short term, optimizing costs and increasing profitability. The company is positioned as a unified chemical and pharmaceutical industry platform under Sinopharm Group. The strategic positioning is clear, and high-quality development is solidly promoted. Looking forward to the future, we believe that the company 1) is steadily improving the profit quality of API intermediates; 2) developing strength in the field of formulation potential; 3) the collaborative promotion of the Sinopharm system is worth looking forward to, and we are optimistic about the company's long-term development.

occurrences

The company released the 2024 semi-annual report and 2024 interim profit distribution plan on August 27. The company released the 2024 semi-annual report. 24H1 achieved revenue of 59.6 billion, -7.52% year over year; net profit to mother of 0.718 billion, +108.29% year over year; net profit without return to mother 0.683 billion, +112.13% year over year.

24Q2 achieved revenue of 2.837 billion yuan in a single quarter, -6.30%; net profit to mother 0.387 billion, +133.66% year over year; net profit after deducting non-return to mother 0.357 billion, +135.86% year over year.

Mid-term profit distribution plan: Cash dividends of 1 yuan (tax included) are distributed for every 10 shares, with a total cash dividend of 0.134 billion yuan, with a dividend payment rate of 18.67%.

Brief review

Performance is in line with forecast expectations, and profit quality has improved markedly

24H1 achieved operating income of 5.96 billion yuan, -7.52% year over year; net profit to mother of 0.718 billion, +108.29% year over year; net profit after deducting non-return to mother of 6.80.3 billion yuan, +112.13% year over year. The decline in the company's revenue side is mainly affected by the price reduction of pharmaceutical products and the price linkage of the “four same” policy; the net profit side achieved rapid growth. We believe that while the company's API sector's revenue growth and gross margin increase, the company's sales expenses rate dropped significantly due to the company's marketing model adjustment and transformation in the formulation sector. The results were in line with previously forecast expectations.

By sector: 1) The API intermediates business performed well: 24H1's API and pharmaceutical intermediates segment achieved sales revenue of 26.80.7 billion yuan, +7.38% over the same period last year, accounting for 45.08% of revenue. The sector's gross profit margin was 32.29%, +10.97 pct year over year. We judge that sales in the company's API segment are mainly driven by penicillins and macrolides. The penicillin intermediate 6-APA is prioritized for self-produced downstream high value-added products. Sales of ampicillin, amoxicillin, and clavulanic acid series products increased by 805.78%, 93.78%, and 33.95% year-on-year respectively; the volume and price of the macrolide API azithromycin increased sharply, driving the revenue scale to double year-on-year. The increase in the profit quality of the sector is mainly due to: 1) changes in the sales structure and a sharp increase in the sales scale of high-margin products; 2) the company reduced the purchase price of some raw materials through strategic procurement and optimization of supplier channels; 3) continued promotion of process optimization and reduction of production costs for key API products. Overall, the API business clearly drives the company's performance.

2) Pharmaceutical business revenue is under pressure in the short term, optimizing expenses to increase profitability: 24H1's formulation division achieved sales revenue of 3.113 billion yuan, -14.88% year-on-year, accounting for 52.23% of revenue. The formulation sector is mainly affected by price reduction linked to collection and procurement and price linkage under the “four same” policy, and the scale of revenue is under pressure. By sector, (1) revenue in the field of systemic anti-infective drugs was -5.48%; (2) revenue and gross profit levels in the field of neurological medicine showed a slight year-on-year increase, mainly benefiting from the company's increased market development in primary medical institutions; (3) revenue in the field of respiratory medicine +5.54% year-on-year, mainly benefiting from increased terminal demand; (4) the average decline in revenue in the fields of cardiovascular, antitumor and immunomodulation, digestive tract and metabolism reached 41%; (5) urogenital system, hormone preparations, skeletal muscle system drugs, hematopoietic system The average decline in revenue in the sector was about 22 %. Due to the decline in overall sales volume, the gross margin of the formulation sector decreased 6.4 pct year over year. The company actively responds to industry trends, continuously promotes the adjustment and transformation of marketing models, and carries out marketing management improvements. The sales expense ratio decreased by 7.41 percentage points year on year. The decline in sales expenses was greater than the decline in gross margin, and the overall profitability of the formulation sector continued to improve.

The Group's strategic positioning is clear, and high-quality development is solidly promoted. The company belongs to Sinopharm Group and is positioned as a unified chemical and pharmaceutical industry platform under Sinopharm Group. Currently, the company has formed a specialized development pattern with unified strategy, concentrated resources, scale effects, and collaborative advantages in the upstream and downstream industrial chains.

In terms of collaboration within Sinopharm Group, the company actively participated in the Sinopharm Group's “Family Family” development plan: 1) Continuously strengthen cooperation with Sinopharm Holdings, the leading commercial company within the Sinopharm Group, and strengthen linkage with the commercial sector within the Sinopharm Group through various methods such as online connection and participation in Sinopharm Group's interconnection; 2) Strengthen resource connections with Sinopharm Group's medical service sector to implement “industrial and medical collaboration”; 3) Participate in Sinopharm Group's integrated supply chain system to strengthen “industrial and industrial collaboration”. The effect of synergy and cohesion continues to show. In terms of R&D, the company adheres to the “technology led, innovation-driven” strategy, built a multi-level integrated R&D system with Sinopharm Modern Research Institute as the main innovator, and promoted the transformation of innovative achievements. 2024H1 Company passed 21 consistency evaluation projects (including deemed equivalent), of which 1 was introduced through MAH approval; the API registration number was transferred to “A” for 3 items. Fifteen official BE tests were implemented, and 13 pre-BE tests were implemented, an increase of 40% over the previous year. The company actively promoted industry-research cooperation, prepared a joint laboratory with the University of Macau; reached a synthetic biology cooperation with East China University of Technology; and jointly built the “Advanced Health Technology Transformation Joint Research Laboratory” and “High-end Formulation Research and Development Joint Laboratory” with Shenzhen University of Technology to solidly promote the department's independent innovation and promote high-quality development.

Profitability has improved markedly, and all expenses are well controlled. The company's 24H1 gross profit margin was 39.63%, +0.46 pct year on year; net profit margin was 14.88%, +6.9 pct year over year; we think it was mainly due to 1) adjusting the product structure and increasing the proportion of high-margin product structures; 2) improving quality and efficiency to reduce production costs by improving process technology, strengthening integrated management and large-scale production; 3) Continuing to promote cost reduction and fee control to boost management efficiency. From the perspective of cost control, the company's 24H1 sales expense ratio is 12.02% (-7.41 pct), management expense ratio 6.27% (+0.6 8 pct), R&D expense ratio 4.1% (+0.32 pct), and financial cost ratio -1.03% (-0.41 pct). All expenses are well controlled, and sales expenses have dropped significantly.

The net cash flow from 24H1's operating activities was 1.817 billion yuan, +99.2% year over year. Mainly due to the increase in the cash ratio of the company's operating income during the reporting period, the cash flow from operating activities was good. As of 24H1, the company had a monetary capital of 6.454 billion yuan and sufficient cash on hand, laying a solid foundation for subsequent R&D investment and business expansion. The rest of the financial indicators are generally normal.

Future outlook: 1) The profit quality of API intermediates has improved steadily: the net profit of the company's subsidiary Sinopharm Weiqida 23H1, 23H2, and 24H1 was 0.026 billion yuan, 0.153 billion yuan, and 430 million yuan respectively, with significant improvements over the previous month. At present, the main varieties have maintained their prosperity and are expected to steadily improve the profit quality of the company's API intermediates; 2) Development in the pharmaceutical field: the company's formulation sector is based on high-end and specialty chemical generic drugs, gradually increasing the proportion of improved new drugs and innovative drugs, forming a “generic combination” development situation. As the company continues to advance product layout and market development around treatment fields such as anesthesia, analgesia, and antidepressants, it will drive continued strength in potential fields. 3) Collaborative promotion of the Sinopharm system: The company is positioned as a unified chemical and pharmaceutical industry platform under the Sinopharm Group, which has the advantage of being an industrial platform. Currently, the company is actively participating in Sinopharm Group's “Family Family” development plan, continuing to strengthen cooperation with Sinopharm Group's internal commercial giant Sinopharm Holdings, strengthening resource connections with Sinopharm Group's medical service sector, and participating in the Group's industrial chain supply chain integration system. Future collaborative promotion is worth looking forward to.

Profit forecasting

We forecast that in 2024-2026, the company's revenue will be 116.32 billion yuan, 122.84 billion yuan, and 13.133 billion yuan, respectively, up -3.6%, 5.6%, and 6.9% year-on-year, respectively; net profit to mother will be 12.15, 14.07 billion yuan, and 1,707 billion yuan, respectively, up 75.6%, 15.8%, and 14.2% year-on-year, respectively. Equivalent EPS was 0.91 yuan/share, 1.05 yuan/share, and 1.2 yuan/share, respectively. The corresponding PE was 12.9X, 11.1X, and 9.7X, which covered for the first time and gave a “buy” rating.

Risk warning

Risk of price fluctuations of major products: The company's business includes antibiotic intermediates and APIs. Currently, prices of products such as penicillin intermediates and erythromycin thiocyanate have been rising in recent years. Significant price fluctuations in the future will affect the company's main business revenue growth.

Industry competition intensifies risks: Currently, the competitive pattern in the market where the company's main products are located is relatively stable. If prices rise further and more competitors join the market in the future, increased competition may reduce the company's profit level; in addition, if additional production capacity is supplied in international markets such as India, it may have an impact on the prices of the company's related varieties.

Industry policy risks: Currently, centralized procurement of national pharmaceuticals and medical insurance negotiations are gradually being normalized. If the company's main pharmaceutical products fail to win the bid in national collection, sales of the company's pharmaceutical products at public medical institution terminals may be restricted, which will adversely affect the company's domestic market share and business performance.

Risk of changes in overseas demand: A certain percentage of the company's current products and future product sales are used for export. A decline in overseas demand will adversely affect the company's performance.

Sensitivity analysis: Currently, the company's API sector has a driving effect on revenue growth and profit levels. If the API business growth falls short of expectations and the 2024-2026 revenue falls to 50.29, 51.80, and 5.231 billion yuan, then the 2024-2026 revenue growth rate will drop to -4.82%, 3.61%, and 4.30%. The corresponding net profit growth rate attributable to mother was adjusted to 74.17%, 14.06%, and 11.81%.