Incident: 2024.8.27 The company released its semi-annual report. 2024H1 revenue was 20.463 billion yuan, down 4% year on year, up 5% year on year; net profit to mother was 1.225 billion yuan, down 31% year on year; after deducting non-1.254 billion yuan, down 9% year on year; 24Q2 revenue was 10.306 billion yuan, down 2% year on year; net profit to mother was 0.615 billion yuan, down 22% year on year due to changes in the fair value of 2402 financial assets -0.26 billion yuan, down 0.8 billion yuan year on year; net profit without return to mother was 0.646 billion yuan, up 42% year on year.

Revenue from 24H1 innovative drugs is growing steadily, and profits in the device and service sector are under pressure. 1) Pharmaceutical business revenue was 14.7 billion yuan, down 8% year on year, accounting for 72%. Excluding COVID-19, revenue increased 1.89% year on year, and profit was 1.571 billion yuan, up 10% year on year. Revenue from anti-tumor products was 4.1 billion yuan, up 10% year on year, mainly sales growth of products such as trastuzumab and slulizumab; revenue of anti-infective products was 1.453 billion yuan, down 56% year on year due to a decrease in sales of azavudine tablets, etc.; and revenue from cardiovascular products was 1 billion yuan, up 22% year on year, due to the increase in overseas markets and sales of heparin preparations. 2) Revenue from medical devices and medical diagnostics was 2.1 billion yuan, down 7% year on year. Revenue excluding COVID-19 increased 5% year on year, profit -0.054 billion yuan, and decreased by 0.168 billion yuan year on year. The main reason was a sharp drop in revenue from COVID-19 antigen and nucleic acid detection reagents, sales of medical diagnostic products fell short of expectations, and direct sales costs rose in some regions of Furui Medical. 3) Revenue from healthcare services was 3.7 billion yuan, up 17% year on year, profit -0.14 billion yuan, and loss decreased by 0.128 billion yuan year on year. The decrease in loss was due to online business focus, optimized spending, and cost reduction benefits of pharmaceutical equipment collection.

Expense control is good, and the overall cost rate has declined. The 24H1 sales expense ratio was 21%, down 3 pcts year on year; the management expense ratio was 10%, up 0.5 pct year on year. Excluding the impact of new mergers and acquisitions, management expenses decreased by about 0.2 billion yuan; the R&D cost ratio was 9%, down 1 pct year on year, and R&D investment totaled 2.737 billion yuan, including continued increase.

The R&D cost is 1.862 billion yuan, and the pharmaceutical sector's R&D cost is 1.572 billion yuan. The company invests in innovative R&D and continues to receive approval for R&D and BD innovative drugs, increasing the growth momentum of innovative drugs. Four innovative drugs/biosimilar drugs independently developed and licensed by 24H1 have been approved for marketing with a total of 9 indications. Trastuzumab was marketed in the US, rabies vaccine (Vero cell) was marketed in China, 4 new indications for adalimumab were approved in China, and the second indication for alvastopam maleate was approved in China.

Investment suggestions: The company has a wealth of listed products, covering a wide range of fields. With the launch of anti-tumor products, the sales volume and sales share of high-margin biopharmaceuticals gradually increased. At the same time, the company continued to develop and introduce macromolecules and small molecules. Innovation and internationalization contributed new volume to the company. We expect the company's revenue in 2024-2026 to be 44.7/49.5/54.5 billion yuan, with a year-on-year growth rate of 8%/11%/10%, net profit of 2.8/3.5/4.2 billion yuan, a year-on-year growth rate of 18%/23%/22%. The corresponding PE is 21/17/14X, which is based on the average valuation of similar companies. The company's current profit forecast corresponding to 24 years of PE is already at a reasonable level, covered for the first time, and given a “recommended” rating.

Risk warning: the risk of rising raw material prices; the risk of exchange rate fluctuations affecting the company's exchange earnings; the risk that downstream demand recovery falls short of expectations; the risk that product sales fall short of expectations; the risk that R&D progress falls short of expectations.