Key points of investment:

A comprehensive pharmaceutical manufacturing state-owned enterprise, 24H1 achieved net profit of 0.718 billion yuan to mother. The company is a pharmaceutical manufacturing enterprise whose main business is R&D, production and sales of pharmaceutical products. It has business segments including pharmaceutical intermediates and APIs, chemical preparations, animal vaccines, and general health. In the first half of 2024, the company achieved operating income of 5.96 billion yuan, a year-on-year decrease of 7.52%; realized net profit to mother of 0.718 billion yuan, an increase of 108.29% over the previous year.

The API sector contributes to profit flexibility, and the product sales structure continues to be optimized. In the first half of 2024, the company's APIs and pharmaceutical intermediates segment achieved sales revenue of 2.687 billion yuan, an increase of 7.38% over the same period last year, accounting for 45.08% of 24H1's revenue. The company continues to optimize the product sales structure: 1) 6-APA, an upstream intermediate in the penicillin series, is prioritized for export sales of downstream high-value-added products. Sales of ampicillin, amoxicillin, and clavulanic acid products increased by 805.78%, 93.78% and 33.95%, respectively. The sharp increase in sales led to a significant increase in revenue; 2) The volume and price of azithromycin, a macrocyclic lactone API, increased rapidly, leading to a year-on-year increase in revenue scale. The gross margin of the pharmaceutical intermediates and APIs business segment was 32.29%, up 10.97 percentage points from the same period last year.

The pharmaceutical sector's revenue scale is under pressure, and cost control maintains overall profitability. In the first half of '24, the revenue scale of the formulation sector continued to be under pressure due to the price reduction of the “four same” drugs, and achieved sales revenue of 3.113 billion yuan, down 14.88% from the same period last year, accounting for 52.23% of 24H1's revenue.

Due to the decline in overall sales scale, the gross margin of the company's 24H1 formulation segment fell 6.40 percentage points year on year. The company's 24H1 overall sales expense ratio was 12.02%, a year-on-year decrease of 7.41 pct. The decrease in sales expenses was greater than the decline in gross margin, maintaining a further increase in the overall profitability of the formulation sector.

Profitability forecasting assumptions. 1) With the gradual stabilization of demand for APIs and the improvement of the company's sales structure, we expect that the operating revenue of the APIs and intermediates sector will increase by 0%/5%/5% in 24-26; 2) With the gradual clarification of the impact of collection and the launch of new products, we expect the pharmaceutical sector's revenue to increase by -3%/6%/8% in 24-26. 3) Assuming that the health sector continues to operate steadily, operating income will increase 15%/15%/15% in 24-26.

Profit forecasting and valuation. We estimate the company's 2024-26 revenue of 12.024/12.825/13.836 billion yuan, net profit to mother of 1.173/1.378/1.589 billion yuan, and EPS of 0.87/1.03/1.218 yuan. Referring to comparable companies Tonghe Pharmaceutical, Xianju Pharmaceutical, and Huahai Pharmaceutical, we gave the company 2024 P/E17-22x, a reasonable value range of 14.87-19.24 yuan, and a reasonable market value range of 19.9-25.8 billion yuan, giving it a “superior to the market” rating.

Risk warning. Risk of price reduction of APIs and intermediates, risk of sales falling short of expectations.