Incident: The company recently released its 2024 semi-annual report. 2024H1 achieved revenue of 2.173 billion yuan (-8.02%) and net profit of 0.489 billion yuan (+8.66%); of these, 2024Q2 achieved revenue of 0.945 billion yuan (-7.08%) and net profit to mother of 0.222 billion yuan (+7.11%). The company plans to distribute semi-annual profits, with a cash dividend of 0.50 yuan (tax included) per share. If calculated on the basis of the company's total share capital at the end of the 2024 half-year period, the current cash dividend amount accounts for 64.36% of the net profit attributable to mother for the first half year of 2024.

OTC is progressing steadily, the big health business is under marginal pressure, and the recovery of the prescription drug business has exceeded expectations. The company focuses on its main business, strengthens brand potential, enhances innovation efficiency, and enhances core functions and core competitiveness. The OTC business achieved revenue of 1.725 billion yuan in 2024H1, 2.64% year-on-year, and gross margin increased 2.20 percentage points year-on-year. The company adheres to the strategy of “big single products, strong categories”, establishes a product group with large single products as the core, and expands the matrix of advantageous categories. The spleen and stomach category builds a brand around Jiangzhong to create a new concept of food partners; the intestinal category establishes a gut health treatment combination through lactobacillus tablets and bifidobacteria trifecta enteric capsules (Beifida). In the throat, cough and wheezing category, a category cluster was built with herbal coral lozenges and compound fresh bamboo extract as the core. Sales of compound fresh bamboo extract exceeded 100 million in 2023, and 2024H1 revenue increased by more than 30% year-on-year, accounting for a larger market share. In the supplement minerals category, brand integration is being built around multi-dimensional element tablets to expand traditional Chinese medicine nourishment products for qi and kidney supplementation.

Big Health Business 2024H1 achieved revenue of 0.194 billion yuan, a year-on-year decrease of 41.74% due to factors such as increased competition in the industry, the company's reorganization of its business development position, and optimization of the organizational structure. The focus is on building category clusters, promoting digital transformation, and promoting the development of multiple categories by focusing on the high-end nourishing category of ginseng herb, rehabilitation category primitive series, gastrointestinal probiotics, and liver health category pure liver tablets.

The prescription drug business was affected by market contraction after some products were collected and prices fell after winning the bid. H1 revenue was 0.236 billion yuan (-27.79%). In the context of policies such as normalized collection, the company's prescription drug business actively adapts to changes in the industry and continuously strengthens compliance management. Through measures such as secondary market development, channel management, and academic endorsements, the decline was drastically reduced compared to Q1, and the revenue decline is expected to shrink further in the second half of the year.

The company's cost control has been strengthened, the cost rate and sales expense ratio have decreased, and the R&D expense ratio has continued to rise. The cost rate during 2024H1 was 41.04%, down 2.67 percentage points year over year. Among them, the sales expense ratio fell from 38.97% in '23 to 35.94%, a decrease of 3.03 percentage points; the management expense ratio remained basically the same from 3.93% to 3.98%. The R&D cost rate increased from 1.94% to 2.99%. The company drives industrial development with technological innovation. The company participated in the project and won the second prize of the National Science and Technology Progress Award, and further cooperated with many universities to rely on key laboratories to recruit talents from both sides. Focusing on the “Improve Quality, Increase Efficiency, and Value Rewards” action plan, the company promotes intelligent transformation and modern base construction to achieve the company's technological upgrading and digital transformation.

Stable and high dividends to share development benefits. Since China Resources joined, the company distributed dividends once in 2019-2020. In 2021-2023, the company maintained the three-quarter and annual dividends; if the share repurchase amount already implemented in that year is treated as a cash dividend and included in the calculation of that year's cash dividend ratio, the company's annual cash dividend in 2021-2023 accounted for 122.80%/121.46%/115.52% of the net profit due to the mother. The total dividend for the period of 2019-2023 accounted for more than 90% of the total net profit to the mother. 107.7%

Investment advice/profit forecast: Considering that the company's OTC and health businesses are still stable, and the company maintains high dividends. The company's 2024-2026 revenue is expected to be 4.535/5.145/5.833 billion yuan; net profit to mother is 0.786/0.937/1.086 billion yuan. EPS was 1.25/1.49//1.73 yuan, respectively; the corresponding PE was 16.55/13.88/11.97 times, respectively, giving a “gain” rating for the first coverage.

Risk warning: policy risk, product promotion falls short of expectations, R&D falls short of expectations, competition intensifies