In the first half of 2024, the company achieved operating income of 9.763 billion yuan, up 0.02% year on year; net profit to mother was 1.021 billion yuan, up 3.49% year on year; net profit after deducting non-return to mother was 0.992 billion yuan, up 1.35% year on year.

Among them, Q2 2024 achieved operating income of 4.496 billion yuan, a year-on-year decrease of 2.64%; net profit to mother was 0.445 billion yuan, a year-on-year decrease of 3.90%; net profit after deducting non-return to mother was 0.421 billion yuan, a year-on-year decrease of 8.41%.

The cost of Chinese herbal medicines affects short-term gross profit margins, the cost ratio is reduced during the period of improving quality and efficiency, and mid-term dividends are once again being initiated to give back to investors. The first half of the year was mostly affected by the rise in the cost of core Chinese herbal medicines. The gross margin of the company's pharmaceutical industry was 41.39%, down 3.53 pcts year on year; the gross margin of the pharmaceutical business also fell 3.74 pct due to product restructuring. The company's overall gross margin in the first half of the year was 43.90%, down 2.20 pct year on year. However, the company achieved remarkable results in improving quality and efficiency. In the first half of the year, all three rates were reduced. The sales expenses rate was 16.88%, down 0.61 pct from the previous year, the management fee ratio was 7.12%, 0.68 pct lower than the previous year, and the net profit margin on sales was 15.52%, slightly lower than the previous year, and the net profit margin to mother was 10.46%. The company announced the launch of mid-term dividends. For the first time since 2019, it plans to distribute cash dividends totaling 0.686 billion yuan, with a dividend ratio of 67.17%.

Core varieties have maintained steady growth, and second-tier varieties have gradually contributed to the increase. In the first half of the year, the company's pharmaceutical industry business revenue was 6.472 billion yuan, up 5.30% year on year. Among them, the top five core products had revenue of 3.047 billion yuan, up 4.18% year on year. While maintaining steady growth in the core series of products, the growth of second-tier products drove the growth of the pharmaceutical industry business faster.

The profitability of the pharmaceutical business has improved markedly. The revenue of the pharmaceutical commercial business in the first half of the year was 6.03 billion yuan, up 8.94% year on year. As of 2024H1 core subsidiary, Tongrentang Commercial had 1,116 stores, opened 16 new stores, closed 1 store in the first half of the year, and 682 pharmacies set up traditional Chinese medicine clinics.

In the first half of the year, Tong Ren Tang's commercial revenue was 5.626 billion yuan, up 0.75% year on year, but profitability increased significantly, achieving net profit of 0.295 billion yuan to mother, an increase of 7.84% year on year.

Imported beef yolk is liberalized, and the pressure on the company's raw material costs is expected to gradually ease. In June 2024, the State Drug Administration and the General Administration of Customs jointly issued the “Notice on Matters Relating to Allowing the Pilot Use of Imported Beef Yellow for the Production of Proprietary Chinese Medicines (Draft for Comments)”, which proposes that beef yolk that has obtained quarantine admission and passed customs quarantine and inspection by port drug inspection agencies can be imported from countries (regions) where there is no mad cow disease epidemic ban for use in proprietary Chinese medicine production. It is expected that it will effectively mitigate supply shortages in the beef yellow market and reduce cost pressure.

Maintain a “Highly Recommended” investment rating. We believe that the pressure on the company's raw material costs will gradually ease, improve quality and efficiency. The adjusted forecast net profit for 2024-2026 will be 1.8/2.14/2.47 billion yuan, an increase of 7.7%/19.0%/15.6% over the previous year, corresponding to PE 27/22/19 times, maintaining a “highly recommended” investment rating.

Risk warning: policy and marketing risks, raw material supply and price risks, R&D failure risks, etc.