1H24 revenue and net profit to mother increased 0% and 3% year-on-year

The company announced 1H24 revenue, return to mother, and deducted non-net profit of 9.76, 1.02, 0.99 billion yuan (0%, 3%, 1% yoy), of which 2Q24 revenue, return to mother, deducted non-net profit of 4.5, 0.45, 0.42 billion yuan (-3%, -4%, -8% yoy), performed steadily during the same period. In addition, the company announced a semi-annual dividend of about 0.686 billion yuan, accounting for about 67% of the profit due to mother in the first half of the year. We are optimistic that Tong Ren Tang's internal changes will bring about performance sustainability. The second half of the year, especially in the fourth quarter, is expected to accelerate significantly and maintain profit forecasts. The 2024-26 net profit is expected to be 1.96/2.32/2.74 billion yuan (+17%/18%), the 2024 PE valuation is 35x (comparable to the company's average value of 26x, given a certain premium considering brand power), and the target price is 50.02 yuan to maintain the “buy” rating.

Joint Stock Company: Core products performed well. Cost erosion gross profit, fee control and net profit joint stock company (parent company) 1H24's revenue increased 21% year on year to 2.6 billion yuan, gross margin decreased 7.5 pct year on year to 41.6% year on year, and net profit excluding investment income increased 10% to 0.61 billion yuan year on year. We expect revenue growth of 10 to 20% from 2024 to 26:1) We expect Anniu 1H24 revenue to perform well on a high base (1H24 intersegment transactions increased 40% to 2.8 year on year) Billion, mainly due to commercial companies replenishing inventory), channel inventory remains low and is expected to continue to grow by 10-15% in the long term; 2) optimistic about the long-term performance of second-tier varieties in people with high blood pressure, arthritis, and sequelae of stroke in the context of increasing aging; 3) 11 boutique series have been launched, 12 more are planned to be launched in the second half of the year, trial sales of 100 domestic pharmacies in April, and advertising in 15 cities in July is expected to drive a gradual improvement in gross margin and net profit margin in the second half of the year.

Brother companies' performance is divided, and it is expected to accelerate in the next quarter

1) 1H24 of the Technology Company Division's revenue of 2.72 billion yuan (+8% yoy), profit to mother of 0.3 billion yuan (+12% yoy), excluding Sinopharm's gross profit margin of 32.1% (-1.7pct yoy), Liuwei Dihuang increased slightly, and cold relief, Xihuang pills, and green vein drinks increased by more than 20%. We expect revenue growth of 10-20% from 2024-26; 2) Sinopharm's 1H24 revenue 0.61 billion yuan (-16% yoy), net profit to mother 0.2 billion yuan (-16%), mainly due to the decline in revenue in Hong Kong/Mainland/overseas (-24%/+8%/-20% year-on-year change), we expect 2H24 to improve, with revenue growth of 10-20% in 25-26; 3) commercial companies' 1H24 revenue of 5.63 billion yuan (year-on-year flat) and profit to mother of 0.29 billion yuan (+8% yoy). Thanks to strong demand for traditional Chinese medicine treatment and strengthened regional controls, the annual growth rate is expected to be slow and high.

Gross margin was put under pressure after the purchase of beef and yellow, and cost reduction was implemented to increase efficiency

1) 2Q24 gross profit margin of 45.0% (-0.6pct yoy, -2.1pct qoq), net sales margin of 14.5% (-1.3pct yoy, +1.9pct qoq), mainly due to rising costs after purchasing beef yolk; 2) 1H24 net operating cash flow of 0.01 billion yuan, cash from purchasing goods and receiving labor payments increased by about 1.7 billion yuan year-on-year, with inventory increasing by about 1 billion yuan compared to the end of the year (of which raw materials increased by about 0.8 billion yuan), mainly due to the increase of about 0.8 billion yuan in raw materials Increase procurement of precious medicinal herbs; 4) The 1H24 sales/management/R&D rate was -0.6/-0.7/-0.1 pct year-on-year to reduce costs and increase efficiency.

Risk warning: Product sales fall short of expectations, boutique sales fall short of expectations, and raw material cost pressure exceeds expectations.