Core views

On the evening of August 30, the company released its 2024 semi-annual performance report. The first half of the year achieved revenue of 9.763 billion yuan, an increase of 0.02% year on year; realized net profit of 1.021 billion yuan, up 3.49% year on year; realized net profit deducted from non-mother 0.992 billion yuan, up 1.35% year on year; performance was lower than our expectations. Overall, the company's Q2 performance was under pressure in the short term due to the influence of overseas business, but the parent company and domestic subsidiaries grew steadily in core products. Looking ahead to the second half of '24, the core sector is expected to maintain a steady growth trend as the company concentrates on scale, continues to advance the large variety strategy, superposition the company's focus on boutique strategies, and launch a series of herbal medicines products.

occurrences

The company released the 2024 semi-annual results report

On the evening of August 30, the company released its 2024 semi-annual performance report. The first half of the year achieved revenue of 9.763 billion yuan, an increase of 0.02% year on year; realized net profit of 1.021 billion yuan, up 3.49% year on year; realized net profit deducted from non-mother 0.992 billion yuan, up 1.35% year on year; performance was lower than our expectations.

Tong Ren Tang plans to distribute a cash dividend of 5.00 yuan (tax included) for every 10 shares to all shareholders. As of June 30, 2024, the total share capital of the company was 1.371 billion shares. Based on this, the total proposed cash dividend was 0.686 billion yuan (tax included). This cash dividend accounted for 67.17% of net profit attributable to mother in the consolidated statement for the first half of 2024.

Brief review

The parent company's business trend is good, and overseas business has been under pressure for a short time

In the first half of 2024, the company achieved revenue of 9.763 billion yuan, up 0.02% year on year; realized net profit of 1.021 billion yuan, up 3.4% year on year; realized net profit of 0.992 billion yuan, up 1.35% year on year; of these, Q2 achieved revenue of 44.96 yuan in a single quarter, a decrease of 2.64% year on year. The decline on the revenue side was mainly due to overseas subsidiaries being greatly affected by consumption power and revenue pressure; realized net profit to mother of 0.445 billion yuan , a year-on-year decrease of 3.90%; net profit not attributable to mother was 0.421 billion yuan, a year-on-year decrease of 8.41%. The pressure on the profit side was mainly due to the simultaneous decline in gross margin and revenue share of the high-margin industrial sector. Overall, the company's Q2 performance was under pressure in the short term due to the influence of overseas business, but the parent company and domestic subsidiaries achieved steady growth driven by core product growth.

Continued focus on the three major development strategies, and the parent company maintained steady growth

In the first half of 2024, the company continued to deeply cultivate brand building, scrutinize variety resources, and detailed quality management. At the same time, it actively focused on large-scale strategy and focused on main business development. Judging from the business conditions of the parent company and various subsidiaries (according to the company's 2024 semi-annual report data):

1) Parent company: Achieved revenue of 2.605 billion yuan, a year-on-year increase of 20.56%, and net profit of 0.889 billion yuan, a year-on-year increase of 13.20%. As market terminal demand increased, the company actively developed the market, continued to focus on the steady development of the main business, and strengthened variety promotion efforts. Both revenue and profit sides of the parent company achieved steady growth driven by core products, and the overall business situation was good.

2) Tongrentang Technology: Achieved revenue of 4.05 billion yuan, with a year-on-year increase of 2.63%. Among them, the parent company, Tongrentang Sinopharm, and other subsidiaries achieved year-on-year changes of 7.85%, -15.8%, and 2.88%, respectively. The parent company and domestic subsidiaries maintained good growth, and the overseas subsidiary Tongrentang Sinopharm was greatly affected by consumption power. On the profit side, the company's net profit increased 4.07% year on year, and net profit to mother achieved a year-on-year increase of 16.46% to 0.429 billion yuan. Net profit growth rate was relatively fast, mainly due to: 1) the company continued to control management expenses, and the management expense ratio declined; 2) the company sold subsidiaries to generate revenue of 46.544 million yuan.

3) Tong Ren Tang Business: Achieved revenue of 5.626 billion yuan, up 0.75% year on year, net profit of 0.295 billion yuan, up 7.84% year on year. The company continued to optimize the variety layout, build large-scale sales platforms, continuously promote resource integration, deepen marketing reforms, and carry out various tasks such as revitalization actions and retail terminal empowerment to improve the quality of operations and services, and promote steady growth in revenue and profit.

4) Tong Ren Tang Sinopharm: Achieved revenue of 0.605 billion yuan, a year-on-year decrease of 16.36%, net profit of 0.2 billion yuan, a year-on-year decrease of 15.52%, mainly due to continued weakness in the retail market in Hong Kong and Macau, significant changes in the consumption patterns of travelers and local residents, leading to a downward trend in the overall performance. However, the company continued to expand the size of the Hong Kong retail market in the first half of the year, adding three new retail terminals, which is expected to contribute additional growth in the second half of the year.

The industrial sector is growing steadily, and the commercial sector continues to recover

1) Pharmaceutical industry: 24H1, achieved operating income of 6.472 billion yuan, a year-on-year increase of 5.3%, gross profit margin of 41.39%, and a year-on-year decrease of 3.53 percentage points. Among them, the top five products achieved revenue of 3.047 billion yuan, a year-on-year increase of 4.18%, and a gross profit margin of 48.08%, a year-on-year decrease of 8.49 percentage points. It is estimated that this is mainly due to the impact of rising raw material costs; as the company continues to deepen brand building and launch pharmaceutical products, while promoting variety cultivation in an orderly manner, the company's pharmaceutical industry is in large categories Driven by, it maintained a steady growth trend. 2) Pharmaceutical business: Achieved revenue of 6.03 billion, up 8.94% year on year, gross profit margin of 26.67%, down 3.74 percentage points year on year. As the company continues to strengthen terminal coverage and deepen marketing reforms, the quality of operation and service has improved. In terms of the number of stores, as of the first half of 2024, Tongrentang Commercial had a net increase of 115 stores, of which 116 were newly established and 1 closed. By the end of the year, a total of 1,116 Tongrentang pharmacies had been set up nationwide (682 of which had established traditional Chinese medicine clinics).

Looking forward to the second half of the year 24: The parent company is expected to maintain steady growth, and overseas subsidiaries are expected to resume the outlook for the second half of 24. On the parent company side, as the company focuses on scale, continues to promote the implementation of large-scale product strategies, promote large product sales, improve potential large-scale product additions, and combine the company's focus on boutique strategies to launch the Legendary Medicines series of products. It is expected to maintain a steady growth trend in the second half of 24; in terms of technology subsidiaries, as the company continues to deepen its large-scale strategy, promote full online and offline empowerment through measures such as integrating channels, strengthening control, and boosting terminals It is expected that the market position and share of core products will increase further, and the performance of overseas subsidiaries will gradually improve, which is expected to drive the company's annual performance to achieve steady growth, and the company's fundamental operations will continue to improve in 24 years; in terms of commercial subsidiaries, as Tongrentang Commercial continues to enhance retail terminal operation optimization, deepen retail store terminal layout, innovate service models, make up shortcomings, and actively cultivate and develop logistics distribution business to expand the pharmaceutical e-commerce field. It is expected to achieve healthy growth throughout the year; in terms of overseas business, as Tongrentang Sinopharm actively adjusts its business model and implements a two-wheel drive strategy, Actively opening new retail terminals in Hong Kong and other regions, while strengthening overseas product registration and expansion of sales channels, Tongrentang Sinopharm is expected to achieve a steady recovery in the second half of the year.

The price of raw materials affects gross profit margin, and the rest of the financial indicators are basically normal

In the first half of 2024, the company's comprehensive gross margin reached 43.90%, a year-on-year decrease of 2.2 pp, mainly due to fluctuations in raw material prices; the sales expenses ratio reached 16.88%, a year-on-year decrease of 0.61 pp, and the management expenses ratio reached 7.12%, a year-on-year decrease of 0.68 pp, and the cost control effect was ideal; the R&D expenses rate reached 0.95%, a decrease of 0.09pp year-on-year, and remained stable. Net cash flow from operating activities fell 99.38% year on year, mainly due to an increase in cash to purchase goods and receive labor payments in the current period as production increased and raw material prices rose. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

We believe: 1) The company is backed by the Tongrentang century-old brand, rich in variety resources, and deep operating barriers. As the company's large-scale strategy and secondary development of core products continue to advance, it can guarantee the company's long-term steady growth; 2) Continued deepening of marketing reforms, initial results are showing, and the quality of operation has steadily improved, driving the company's performance to gradually achieve restorative growth under a low base; 3) Multiple signals of the three-year action of state-owned enterprise reform continue to be released. It is worth looking forward to the company's market-based reforms.

We expect the company to achieve operating income of 19.433 billion yuan, 21.74 billion yuan and 24.342 billion yuan respectively in 2024-2026, and net profit to mother of 1.839 billion yuan, 2.065 billion yuan and 2,337 billion yuan respectively, equivalent to EPS (diluted) of 1.34 yuan/share, 1.51 yuan/share, and 1.70 yuan/share, respectively, with year-on-year increases of 10.2%, 12.3%, and 13.2%, respectively. 25.5x, 22.7x, and 20.1x, maintaining a “buy” rating.

Risk analysis

1. The recovery of hospital diagnosis and treatment volume falls short of expectations: after the epidemic, home diagnosis and treatment volume may be affected, which may affect the sales of prescription drugs, which in turn affects the company's overall profit; 2. The risk of drug price reductions, competitive markets such as the company's core products may intensify, leading to a decline in product prices, which in turn affects the company's profit expectations; 3. The risk of raw material price fluctuations. Raw material prices for traditional Chinese medicine products are clearly cyclical. Currently, the price of raw materials may rise further, leading to a further increase in cost pressure, which in turn affects the company's performance; 4. The company's reforms fall short of expectations Risk. The company is actively promoting reform work, but there may be situations where the results of the reform fall short of expectations, which in turn affects the company's profit expectations.