Incident: On October 24, 2024, the company released its report for the third quarter of 2024: the company achieved operating income of 9.082 billion yuan in the first three quarters, down 5.94% year on year; net profit to mother was 1.673 billion yuan, up 4.44% year on year; net profit after deducting non-return to mother was 1.631 billion yuan, up 3.51% year on year. Basic earnings per share were 1.81 yuan, up 5.23% year over year.

Among them, in the third quarter of 2024, the company achieved operating income of 2.799 billion yuan, a year-on-year decrease of 5.59%; net profit to mother was 0.502 billion yuan, an increase of 7.45% year-on-year, and net profit after deducting non-return to mother was 0.475 billion yuan, a year-on-year decrease of 1.36%.

Affected by industry policies, the formulation business volume is slightly slow

In terms of chemical formulations, on the one hand, industry regulation has made it more difficult to increase volume; on the other hand, the stricter assessment of hospital collection has caused some resistance to the increase and coverage of non-collected products, compounding the impact of price cuts on some core products, leading to a year-on-year decline in the revenue side of the formulation business. Revenue of 4.714 billion yuan was achieved in the first three quarters of 2024, a year-on-year decrease of 8.52%. Among them, digestive tract products achieved revenue of 1.854 billion yuan, a year-on-year decrease of 18.66%; sexotropin products achieved operating income of 2.308 billion yuan, an increase of 5.46%; psychotropic products achieved revenue of 0.443 billion yuan, an increase of 3.11%; and anti-infective and other products achieved revenue of 0.109 billion yuan, a year-on-year decrease of 57.32%.

In terms of other business, APIs and intermediate products achieved revenue of 2.521 billion yuan, a year-on-year decrease of 2.55%. Traditional Chinese medicine products achieved revenue of 1.041 billion yuan, a year-on-year decrease of 16.49%.

Biological products achieved revenue of 0.131 billion yuan, an increase of 15.98% over the previous year. Diagnostic reagents and equipment products achieved revenue of 0.566 billion yuan, an increase of 21.03% over the previous year.

The research pipeline is being actively promoted, and aripiprazole microspheres are expected to be approved

Various microsphere products are progressing smoothly: injectable leuprorelin acetate microspheres passed the consistency evaluation and became the world's first long-term gonadotropin-releasing hormone-releasing hormone to be approved for bioequivalence studies in accordance with the US FDA Drug Guidelines. The injectable triprorelin acetate microsphere endometriosis was approved for marketing. Production of injectable ariprazole microspheres was reported in 2023. Supplements have been successfully submitted, and it is expected that 2025H1 will be approved for marketing.

Key biological products are progressing steadily: the indications for simeglutide injection for type II diabetes have been reported, and phase III clinical trials for weight loss indications are ongoing. The recombinant anti-human IL-17A/F humanized monoclonal antibody injection has completed phase III clinical enrollment for psoriasis and ankylosing spondylitis.

Cost reduction and efficiency cost side control is good. The profit side maintained steady growth in the first three quarters of 2024. The company's gross margin increased 1.88pct to 65.81% year over year; sales expenses were 2.456 billion yuan, which was affected by industry regulatory policies, the sales expense ratio decreased by 2.10 pct to 27.05% year over year; management expenses were 0.473 billion yuan, and the management expense ratio increased 0.16 pct to 5.20% year on year; R&D expenses decreased by 2.12 pcts year on year To 8.09%; due to a decrease in deposit interest income and changes in exchange profit and loss, the financial expense ratio increased 1.64pct to -0.60% year over year; under the combined influence, the company's net interest rate increased 4.61 pct to 21.43% year over year.

Among them, gross sales margin, sales expense ratio, management expense ratio, R&D expense ratio, financial expense ratio, and net sales margin for the third quarter of 2024 were 65.47%, 25.59%, 5.06%, 8.71%, 0.81%, and 21.12%, respectively, with changes of +1.90pct, -2.98pct, -0.88pct, -3.94pct, +6.71pct, and +5.93pct, respectively.

Profit forecast and investment rating: We estimate that in 2024-2026, the company's net profit to mother will be 2.069 billion yuan/2.296 billion/ 2.571 billion yuan, respectively, with year-on-year growth rates of 5.88%/11.02%/11.97%; EPS will be 2.23 yuan/2.48 yuan/2.77 yuan, respectively. The current stock price corresponding to 2024-2026 is 17 times/15 times/14 times, maintaining the “buy” rating.

Risk warning: the risk of price reduction of pharmaceutical products, the risk of products under development not being approved as expected, and the risk of increased market competition.