Incident: On August 28, Guilin Sanjin released the “2024 Semi-Annual Report”. 2024H1, the company achieved operating income of 1.068 billion yuan, a year-on-year decrease of 10.5%; realized net profit to mother of 0.301 billion yuan, a year-on-year decrease of 20.7%; and basic EPS of 0.51 yuan/share, a year-on-year decrease of 21.5%.

The single-quarter performance is second in history, and the core proprietary Chinese medicine business performed well. In 24Q2, the company achieved operating income of 0.586 billion yuan, a year-on-year increase of 22.5%; achieved net profit of 0.201 billion yuan, a year-on-year decrease of 4.5%. The company's second-quarter revenue and profit were the second highest level in history, after the early liberalization of the epidemic in 23; gross sales margin/net interest rates were 75.13%/34.30%, respectively, +4.25/ -9.68pct; sales/management/R&D/finance expense ratios were 23.28%/6.45%/7.84%/ 0.04%, +4.08/-2.25/+9.76/+1.34 pcts, respectively. The company's fee rate for the first half of the year increased by 5.72 pct compared to the same period last year. It was adjusted according to actual needs. The company's overall cost policy was relatively stable and determined. According to the situation in previous years, the annual fee rate was around 50%.

By entity, the parent company achieved revenue/net profit of 0.934/0.386 billion yuan respectively in the first half of the year, a year-on-year decrease of 8.3%/15.6%, which was less than the consolidated report. Under the high base of the epidemic liberalization in early 23, demand for watermelon cream was still well supported in the first half of this year, and the increased medication usage and health care habits due to the epidemic are expected to continue; Hunan Sanjin achieved revenue/net profit of 73.67/9.74 million yuan respectively, a year-on-year decrease of 9.6%/27.8%; Shanghai Sanjin achieved revenue and net profit respectively 6.61/-96.04 million yuan, a year-on-year decrease of 64.8% and a loss of 8.53 million yuan respectively. The company continued to optimize pipelines, concentrate manpower, and control costs this year. In August, Baochuan Biotech's all-human monoclonal antibody injection BC011 made significant progress and was approved for domestic IND.

Maintaining full-year performance expectations, the estimated dividend rate reached 4.8%. With the end of the epidemic, demand distribution returns to normal, and the company will return to normal operation, and the annual results will be reflected in a more balanced manner in each quarter. Thanks to the outstanding performance in the second quarter, the results achieved in the first half of the year under a high base were basically the same as last year. Due to the concentrated demand that was different from 23H1, we think it may indicate that the epidemic is continuing to change people's health awareness. At a normal pace in the second half of the year, it is expected that the third quarterly report will resume growth. Since large-scale personnel optimization was basically completed in 23, the biopharmaceutical sector reduced losses and entered the deep-water zone. The loss reduction was limited in the first half of the year. With significant progress in BC011's R&D progress, it is expected that subsequent investment will maintain a certain level of strength.

Maintaining full-year performance expectations, the high dividend policy is expected to continue. According to the 80% dividend ratio, the dividend rate corresponding to the current stock price has reached 4.8%, which has allocation value.

Investment advice: As an established traditional Chinese medicine company, the company has two well-known traditional Chinese medicine products, the watermelon cream series and the three gold tablets series. The core product base is stable, the market share is outstanding, and the performance share is high. It is expected that it will continue to benefit from people's attention to throat health care and aging trends in the post-pandemic era, which is the guiding principle for the company's performance. The company's multiple second-tier products have reached a scale of quasi-100 million. Subsequent targeted superposition of sales resources helped accelerate its “1 to 10” growth process and form a second growth curve. Overall, the company has been operating at a low profile for a long time, and there is room for improvement and upgrading in many directions. With the upcoming adjustments to the new version of the basic drug catalogue, many products are facing a development window. The biopharmaceutical sector has had an obvious drag in recent years. As efforts to reduce losses and increase efficiency continue to advance, the company's performance is expected to improve significantly. We predict that the company's 2024-2026 EPS will be 0.80, 0.90, and 1.02 yuan/share, respectively, and the corresponding PE will be 16.5x, 14.8x, and 13.0x, respectively, maintaining a “buy” rating.

Risk warning: Industry policy risks, loss reduction and fee control effects fall short of expectations, competition increases risk, and raw material prices fluctuate.