Core views

As a leading enterprise in the vaccine industry, the company has a developed marketing network and an industry-leading marketing team. In the first half of the year, the company actively responded to market changes, continued to strengthen its own sales capacity building, and promote product sales. Among them, the shingles vaccine contributed to increased performance this year. The company's performance is expected to improve sequentially in the second half of the year as the shingles vaccine continues to be released, compounded by the company's sales strength and improved market environment. In terms of independent products, microcard and IKA products are gradually promoted, and future sales are expected to accelerate; the R&D pipeline continues to advance, which will help the company's independent product performance continue to grow.

occurrences

The company released its 2024 semi-annual report, and the performance fell short of expectations

On August 22, the company released its 2024 semi-annual report. The first half of the year achieved: 1) operating income of 18.258 billion yuan, a year-on-year decrease of 25.31%; 2) net profit of 2.239 billion yuan, a year-on-year decrease of 47.55%; 3) net profit of 2.23 billion yuan without return to mother, a year-on-year decrease of 47.04%; 4) basic earnings per share of 0.93 yuan. The results fell short of previous expectations.

Brief review

Overall results in the first half of the year were under pressure. The increase in the share of the 9-valent HPV vaccine affected gross margin in the second quarter of 2024. The company achieved operating income of 6.863 billion yuan, a year-on-year decrease of 48.29%; net profit to mother was 0.777 billion yuan, a year-on-year decrease of 65.14%; and net profit after deducting non-return mother was 0.775 billion yuan, a year-on-year decrease of 64.44%. The performance of 24Q2 and 24H1 companies showed a year-on-year decline, mainly due to the fact that marketing work in some regions and products did not meet expectations, and sales of major products declined year-on-year. The decline on the profit side was greater than on the revenue side, mainly due to: 1) 24H1's share of sales of the 9-valent HPV vaccine increased significantly compared to the same period last year, leading to a decrease in gross margin; 2) the company's expenses changed less from year to year.

Agent products: Revenue side and gross margin are under pressure in the short term, and sales of HPV and shingles vaccines continue to advance. 2024H1's agent product sales revenue was 17.592 billion yuan (-25.40%), and the gross profit margin was 24.74% (-9.91 pct). The year-on-year decline in revenue was mainly due to a year-on-year decline in HPV vaccine sales; the decrease in gross margin was mainly due to a significant year-on-year increase in the share of 9-valent HPV vaccine sales. Facing a complex market environment in the first half of the year, the MSD HPV vaccine represented by the company maintained a leading market share. In January 2024, the MSD 9-valent HPV vaccine was approved as a two-dose vaccination procedure for ages 9-14, which is beneficial to increasing the HPV vaccination rate among younger women. In the first half of the year, the company began selling the GSK recombinant shingles vaccine as an agent. At present, it has achieved coverage of more than 20,000 terminal users across the country, and 1.6069 million tablets were issued in batches in the first half of the year. It is expected that in the second half of the year, as the market environment improves, the company's HPV vaccine sales are expected to improve month-on-month; the accelerated release of the shingles vaccine will not only bring new volume to performance, but also help increase the gross margin level of agent products and enhance the company's profitability.

Independent products: Affected by the number of newborns and the market environment, MicroCard and IKA are expected to help increase performance. 2024H1's independent product sales revenue was 0.551 billion yuan (-35.95%), and the gross profit margin was 85.38% (-1.57pct). Revenue declined year-on-year, mainly due to: 1) short-term sales pressure on children's vaccine products due to the number of newborns; 2) marketing of IKA and microcard products was adversely affected. The company's self-developed products, Microcard and Yika, are included in the “China Tuberculosis Preventive Treatment Guidelines”. Microcard is the only biological product recommended in the guidelines for immunoprophylactic treatment of tuberculosis; ICA is included in the 2023 National Health Insurance to help key population groups screen for mycobacterium tuberculosis infection. In the future, as the company's tuberculosis product matrix, WeChat and IKA are expected to have a synergetic effect to help grow revenue from independent products.

Continue to strengthen the independent marketing team and further enrich the R&D pipeline. The company has a developed marketing network and an industry-leading marketing team, and continues to enhance its sales capacity building. Currently, the sales network covers 31 provinces and cities, more than 2,600 districts and counties, and more than 0.03 million primary health service points across the country. By the end of 24H1, the company had a large-scale professional marketing team of 4,749 people, an increase of 39.51% over the previous year. The company continues to strengthen its independent research and development capabilities and accelerate the R&D pipeline. Currently, the quadrivalent influenza vaccine is in the marketing review stage; the human diploid rabies vaccine and the trivalent influenza vaccine have completed phase III clinical trials; and various products are in phase III clinical trials. The quadrivalent norovaccine has entered phase III clinical trials, and the development progress is at the forefront of the industry; PCV26 has entered phase I/II clinical trials. Products such as the quadrivalent influenza vaccine, MCV4, and PCV15 are expected to be approved within the next few years, which will help the company's performance continue to grow over the long term.

We attach great importance to shareholder returns and share the company's development achievements with shareholders. In June 2024, the company's 2023 annual shareholders' meeting reviewed and approved the “Annual Profit Distribution Plan and Interim Dividend Proposal”, and it is proposed to distribute a cash dividend of 8 yuan (tax included) to all shareholders for every 10 shares based on 2.394 billion shares in 2023. From the disclosure of the 2024 semi-annual report until December 31, 2024, the 2024 interim profit distribution was carried out in cash, based on the total share capital registered on the share registration date of the equity distribution. A cash dividend of not less than 2 yuan (including principal amount) was distributed to all shareholders for every 10 shares, but not more than the net profit attributable to shareholders of the listed company during the corresponding period. By the end of 24H1, the company's 2023 profit distribution plan had been implemented. Since listing, the cumulative cash dividend was 6.839 billion yuan, which is 4.77 times the net capital raised in the initial round.

The revenue structure adjustment affected 24H1 gross profit margin. The size of accounts receivable decreased. 2024H1's gross profit was 4.866 billion yuan (-32.64%), and the gross profit margin was 26.65% (-2.90pct). The decline in gross margin was mainly due to an increase in the share of revenue from the 9-valent HPV vaccine and changes in the revenue structure. In terms of expenses, 24H1's sales expenses were 1.116 billion yuan (-5.90%), sales expense ratio 6.11% (+1.26pct); management expenses 0.203 billion yuan (+10.59%), management expense ratio 1.11% (+0.36pct); R&D expenses 0.461 billion yuan (+5.60%), R&D expenses rate 2.53% (+0.74pct); financial expenses 0.021 billion yuan (-6.37%), financial expenses ratio 0.11% (+0.02pct). All cost rates have increased, mainly due to year-on-year decline in revenue and minor changes on the cost side.

24H1's net operating cash flow - 0.307 billion yuan (-114.12%), mainly due to an increase in payment payments for the purchase of goods; accounts receivable of 25.472 billion yuan, a year-on-year decrease of 1.56%, a decrease of 5.86% from the end of 2023, mainly due to an increase in cash received from selling goods and providing services. Credit impairment losses amounted to $0.397 billion, up 25.14% year over year, mainly due to increased preparation for bad debts. Inventory was 15.653 billion yuan, accounting for 28.54% of total assets (+10.65pct), mainly due to planned procurement of agency products in the first half of the year.

Outlook for the second half of 2024: With leading sales capacity and shingles vaccine release volume, we expect to improve performance month-on-month. As a leading enterprise in the vaccine industry, 2024H1 is facing some pressure on product sales growth in a complex market environment and fierce competition. The company continues to promote sales of agent products and independent products. Among them, the shingles vaccine began selling this year, contributing to the increase in performance. The company has a developed marketing network and an industry-leading marketing team, which helps the company cope with market changes and promote product sales. In the second half of the year, performance is expected to improve month-on-month as the shingles vaccine continues to be released, compounded by the company's sales strength and improved market environment. In terms of independent products, microcard and IKA products are gradually promoted, and future sales are expected to accelerate; the R&D pipeline continues to advance, which will help the company's independent product performance continue to grow.

Profit Forecasts and Investment Ratings

Without considering the COVID-19 vaccine profit forecast, we expect the company's revenue from 2024 to 2026 to be 40.966 billion yuan, 42.573 billion yuan and 41,791 billion yuan respectively, with net profit attributable to mother of 5.812 billion yuan, 6.779 billion yuan and 7.669 billion yuan respectively, down 28.0% year on year in 2024, 16.6% year on year and 13.1% year on year, respectively, from 2025 to 2026, equivalent to EPS of 2.43 yuan/share, 2.83 yuan/share and 3.20 yuan/share. The corresponding PE is 9.5X, 8.1X, and 7.2X, respectively, maintaining the purchase rating.

Risk analysis

1. Risk of execution of agency agreements: The company's revenue mainly comes from agency products. If the other party to the agreement cannot provide products as contracted and the company fails to complete the target amount as agreed, it will pose a certain risk to the company's future profits; 2. Risk of industry policy changes: Vaccine companies have strict policies, regulations and restrictions from vaccine research and development, production to sales. Policy changes may cause the company to face new competitive pressure or risks and affect business development; failure in product development and registration: product development is critical to the future development of vaccine companies, and research and development fails in the research pipeline Or product registration failure may affect the company's future sales expectations, which in turn affects valuation;

4. Vaccine management compliance risks: Because vaccines have special biological characteristics, their regulatory requirements are stricter and the scope of management is broader. If an enterprise violates operating compliance requirements, it will not only adversely affect the operation and production of the enterprise itself, but may also cause fluctuations in the vaccine industry.