Core views

The company achieved revenue of 7.817 billion yuan in H1 in '24, a year-on-year decrease of 13.64%; realized net profit of 0.495 billion yuan, a year-on-year decrease of 12.51%; realized net profit deducted from non-mother of 4.7 billion yuan, a year-on-year decrease of 17.81%. The decline in H1 revenue and profit was mainly due to the high base and high social inventory of some products in the same period last year, the revenue of the industrial sector fell 19.77% year on year, compounded by the pressure on the commercial and Chinese herbal medicine resource sectors, which put pressure on the company's performance in the short term, and the overall performance was lower than our previous expectations. Looking ahead to the second half of the year, as the company's industrial sector strengthens category development and channel construction, the profitability of the commercial sector will further improve, superimpose the company's industrialization of Chinese herbal medicine resources, actively explore a second growth curve, and look forward to long-term growth space.

occurrences

The company released its 2024 semi-annual report. On the evening of August 22, the company released the 2024 semi-annual report, achieving total operating income of 7.817 billion yuan, a year-on-year decrease of 13.64%; realized net profit of 4.9 0.5 billion yuan, a year-on-year decrease of 12.51%; realized net profit without return to mother of 0.47 billion yuan, a year-on-year decrease of 17.81%; achieved earnings per share of 0.89 yuan, which was lower than our previous expectations.

Brief review

Core categories are under pressure from a high base, and cost control continues to deepen

In 2016 H1, the company achieved revenue of 7.817 billion yuan, a year-on-year decrease of 13.64%; realized net profit of 0.495 billion yuan, a year-on-year decrease of 12.51%, and realized net profit deducted from non-mother of 0.47 billion yuan, a year-on-year decrease of 17.81%. In Q2 '24, the company achieved revenue of 3.609 billion yuan, down 21.94% year on year, mainly due to: ① sales of core single products, sales revenue in the industrial sector (without deducting internal offsets) fell 23.99% in the second quarter; ② the commercial sector and Chinese herbal medicine resource sector were under pressure; realized net profit of 0.248 billion yuan, down 25.00% year on year, and realized net profit deducted from 0.252 billion yuan, down 24.49% year on year. The main business growth rate slowed down, and the profit decline was greater than revenue due mainly to: ① Due to category restructuring, gross sales margin fell 2.35 percentage points to 46.99% in a single quarter. ② The company continued to promote cost control, and the expense ratio decreased by 1.87 percentage points during the Q2 period.

Core products in the industrial sector were under pressure for a short time, and the size and profitability of the big health sector grew simultaneously in 24 years. Looking at the H1 segment: ① Pharmaceutical industry: achieved revenue of 5.079 billion yuan, down 19.77% year on year, gross profit margin of 62.90%, down 1.91 percentage points year on year; by category, the company's digestive system (represented by Agastache Zhengqi Oral Liquid), respiratory system (represented by Emergency Syrup), anti-infection (represented by Iboseling), and the three core categories achieved revenue of 1.585 billion yuan and 1.574 billion yuan. billion yuan and 0.683 billion yuan increased by -26.34%, 4.25%, and -37.53%, respectively. Looking at large varieties, Agastache Zhengqi Oral Liquid and Iboseling were under year-on-year pressure; emergency syrup continued a steady growth trend. Overall, the company's industrial sector is under pressure in the short term due to the slowdown in the growth rate of core single products, and it is expected that other Chinese medicine varieties will still achieve steady growth.

② Other sectors: Among them, the pharmaceutical business achieved revenue of 3.741 billion yuan, a year-on-year decrease of 10.96%, a gross profit margin of 8.78%, and the commercial sector continued to be under pressure; Chinese herbal medicine resources achieved revenue of 0.49 billion yuan, a year-on-year decrease of 16.39%, a gross profit margin of 8.69%, an increase of 1.96 percentage points year-on-year, and the Q2 revenue side declined sequentially, and profitability increased steadily; the health sector achieved revenue of 0.265 billion yuan, a year-on-year increase of 79 percent. 63%, gross profit margin 9.18%, a year-on-year increase of 4.94 percentage points. Scale and profitability grew rapidly at the same time.

Looking forward to 24H2: Continue to promote digital transformation and actively explore the second growth curve. In the second half of 2024, the company will continue to promote digital transformation, use data to empower production, operation and organizational transformation, build a modern pharmaceutical industry cluster, develop the industrialization of Chinese herbal medicine resources, and actively explore the second growth curve:

1) Pharmaceutical industry: The company will strengthen category development and channel construction, make every effort to sell strategic main products, and build a multi-variety, omni-channel, and integrated digital marketing platform; in terms of variety, the company will do a good job of planning and supplementing new products, and the Agastache series will achieve full category marketing. It is expected that in the future, under the impetus of increased penetration rate of Agastache in regions other than Sichuan and Chongqing and the addition of a new “moisture removal” positioning, there is still room for growth. Emergency support is expected to maintain good growth on the basis of the company's focus on key markets to achieve integrated development of online and offline sales. The sector continues to grow steadily trends.

2) Pharmaceutical business: In the distribution sector, the company will further promote integration and collaboration to actually raise the overall profit level; in the distribution sector, the company will continue to promote supply chain construction, target at least 50 new first-level distribution accounts for key suppliers, and vigorously develop medical terminals, actively develop grade hospitals, transform from collection and distribution to all categories and business formats to seek new growth points; in the retail sector, the company plans to vigorously develop direct-run franchise pharmacies. The target is to add no less than 100 franchised pharmacies and standardize pharmacy operations with direct management policies and management systems; Special features The TCM Center will increase sales of Taiji brand Chinese medicine tablets; it is expected that they will jointly promote the gradual restoration of healthy growth in the company's commercial sector.

3) Chinese herbal medicine resources: The company will continue to deeply cultivate Chinese herbal medicine resources, continuously expand the scale of the planting base, plan to standardize the planting area of 0.25 million acres, and simultaneously launch the construction of GAP bases for 14 Chinese herbal medicine varieties to form the unique management of Chinese herbal medicines and formula tablets. At the same time, the company will accelerate the industrialization of Cordyceps sinensis, promote the construction of Cordyceps sinensis seed source bases and processing bases, and promote the processing of production standards, digitization of management and local standard formulation for nurturing the potential of Cordyceps sinensis in Sichuan and Chongqing. Gradual release.

Overall, it is expected that the company's industrial sector will strengthen category development and channel construction in '24, and the profitability of the commercial sector is expected to further improve. Combined with the company's development of the industrialization of Chinese herbal medicine resources, actively developing a second growth curve, and optimistic about the company's long-term growth space.

Gross margin is under pressure in the short term, and the cost structure continues to be optimized

In 2024 H1, the company's comprehensive gross margin was 46.71%, a year-on-year decrease of 3.44pp, which is estimated to be mainly affected by calibrations and product structure changes; the sales expense ratio reached 31.66%, a year-on-year decrease of 3.82pp, and the cost settlement continued to be optimized; the management fee ratio reached 4.28%, an increase of 0.34 pp over the previous year, which remained stable; the R&D expense ratio reached 1.49%, an increase of 0.51 pp over the previous year, mainly due to the company's increased investment in R&D. Net cash flow from operating activities - $0.357 billion, is expected to be mainly affected by the fiscal period at the beginning of the year and the year-on-year decrease in cash inflows from operating activities. The rest of the financial indicators are generally normal.

Profit forecasting and investment ratings

Over the past two years, the company's high growth in performance and continuous improvement in management are in line with our judgment in early 2022 that the company's “difficult situation is reversed and growth can be expected”; we believe that the company's current valuation fully reflects short-term fluctuations in operations, and short-term operating fluctuations will not change our long-term judgment on the company's operations. We expect the company to achieve operating income of 15.787 billion yuan, 17.51 billion yuan, and 194.20 billion yuan respectively from 2024 to 2026, and net profit to mother of 0.862 billion yuan, 1.078 billion yuan and 1,348 billion yuan respectively, equivalent to EPS (diluted) of 1.55 yuan/share, 1.94 yuan/share and 2.42 yuan/share, respectively, with year-on-year increases of 4.9%, 25.1% and 25.0%, respectively. 14.2x, 11.4x, and 9.1x. Maintain a “buy” rating.

Risk analysis

1) Product promotion falls short of expectations: the company's sales investment has increased. If product promotion falls short of expectations, it will affect sales revenue and affect the company's profit; 2) the risk of collection and price reduction, the company's core products may further enter the collection list, reduce product prices and reduce product profits, which in turn affects the company's profit expectations; 3) Risk of price increases in raw materials and power costs: the increase in the price of the company's raw materials will cause cost pressure to rise, which in turn affects the company's profit performance; 4) Hospital diagnosis and treatment volume will fall short of expectations: after the epidemic, home diagnosis and treatment volume may be affected. This affects the sales of prescription drugs, which in turn affects the company's overall profit.