Key points of investment

Incident: The company released its 2024 semi-annual report. During the reporting period, it achieved revenue of 9.763 billion yuan (YoY +0.02%), net profit of 1.021 billion yuan (YoY +3.49%), net profit of 0.992 billion yuan (YoY +1.35%); Single Q2 achieved revenue of 4.496 billion yuan (YoY -2.64%), net profit to mother 0.445 billion yuan (YoY -3.90%), net profit not attributable to mother of 0.421 In billion yuan (-8.41% year over year), the performance was under pressure in the short term due to declining gross margin, which is in line with expectations.

The steady growth trend of core varieties remains unchanged. 2024H1 revenue analysis: 1) By company split, the parent company (mainly engaged in Angong gyuhuang pills) achieved revenue of 2.605 billion yuan (+20.56% year over year) and net profit of 0.889 billion yuan (+13.20% year over year); Tongrentang Technology (mainly engaged in Angong gyuhuang pills and supplement products) achieved revenue of 4.05 billion yuan (+2.63% year over year), and net profit of 0.429 billion yuan (+16.46% year over year), all core products achieved steady growth; Tongrentang Commercial (main business) achieved steady growth. The pharmacy business) achieved revenue of 5.626 billion yuan (+0.75% year over year) and net profit of 0.295 billion yuan (YoY +7.84%); Tong Ren Tang Sinopharm (business outside mainland China) achieved revenue of 0.605 billion yuan (-16.36% year over year) and net profit 0.2 billion yuan (-15.52% year over year), mainly due to the decline in sales revenue in Hong Kong and Macau, which dragged down the consolidated growth report. 2) By product breakdown, the top five product series of 2024H1 achieved revenue of 3.047 billion yuan (+4.18% compared to the same period). Considering the strong immediate demand attributes of products such as the company's core product, Yasumiya beef yellow pills, we expect to achieve relatively steady revenue growth throughout the year.

Short-term gross margin is under pressure, and recovery is expected to continue in the medium to long term. The 2024H1 company's comprehensive gross margin was 43.90%, down 2.20 pcts year on year; the parent company's gross margin was 41.60%, -7.51 pcts year on year; the gross profit margin of the top five series products was 48.08%, -8.49 pcts year on year. We expect this is mainly due to the increase in the price of natural beef yolk compared to the same period.

According to data from the Chinese Herbal Medicine World Network, the market price of 2024H1 natural beef yellow is 1.4 million yuan/kg, an increase of 145.61% compared to 0.57 million yuan/kg in early 2023. If the 2024H2 Angong beef yellow pill product is not adjusted in price, we expect 2024H2 gross margin to remain under year-on-year downward pressure, but medium- to long-term gross margin is expected to rise steadily. The net cash flow from 2024H1's operating activities was 0.015 billion yuan (-99.38% year over year), far lower than net profit. We found that it was mainly due to a significant increase in inventory and accounts receivable (2024H1 inventory of 10.408 billion yuan, up 1.068 billion yuan from the end of 2023, and operating receivables increased by 0.64 billion yuan, higher than the value added of 2023H1 operating receivables of 0.119 billion yuan), based on inventory Analyzing structural changes, we found that the main reason is that raw materials have increased quite a bit. We estimate that this corresponding change may be mainly due to the company continuing to purchase relatively high prices of natural beef yolk to meet production needs. However, according to the Chinese Herbal Medicine Tiandi Network, the price of natural beef yolk remained stable from November 2023 to August 2024 and did not continue to rise. Meanwhile, on July 1, 2024, the General Department of the State Drug Administration and the General Office of the General Administration of Customs publicly solicited comments on the “Notice on Matters Relating to Allowing the Pilot Use of Imported Beef Yellow for the Production of Proprietary Chinese Medicines (Draft for Comments)”. In the future, with the entry of overseas beef yolk, we expect that the price of abnormally expensive natural beef yolk in China will gradually drop. In this process, it is not ruled out that the price or gross margin of Angong beef yellow pills will fluctuate later.

Increase mid-term dividends and continue to give back to shareholders. The company issued the “2024 Semi-Annual Profit Distribution Plan Notice”. The company plans to distribute a cash dividend of 5.00 yuan (tax included) to all shareholders for every 10 shares. This time, the company's cash dividend accounts for 67.17% of the net profit attributable to shareholders of listed companies in the consolidated statement for the first half of 2024.

Maintain a “buy” rating. We expect net profit to be 1.882/2.252/2.685 billion yuan in 2024-2026, up 12.75%/19.69%/19.23% year-on-year, and EPS of 1.37/1.64/1.96 yuan. Considering that the company has the characteristics of “strong brand power, minimal adverse effects from policies, and potential power to reform state-owned enterprises,” it maintains a “buy” rating.

Risk warning: risk of policy adjustments; risk of cost fluctuations; state-owned enterprise reform process falls short of expectations.