Key points of investment

Incident: Daren Tang released its 2024 three-quarter report. During the reporting period, it achieved revenue of 5.611 billion yuan (YoY -3.14%), net profit of 0.804 billion yuan (YoY -6.33%), net profit of 0.767 billion yuan (YoY -8.93%); a single Q3 achieved revenue of 1.646 billion yuan (-3.43% YoY), net profit to mother 0.146 billion yuan (YoY +7.69%), net profit of 0.133 billion yuan (YoY +7.69%). billion yuan (+2.46% YoY); performance is in line with expectations.

The industrial sector grew steadily, achieving revenue of 3.59 billion yuan (+4.3% year over year) in the first three quarters; the commercial sector dragged down performance, with revenue of 2.33 billion yuan (-14.5% year over year) for the first three quarters. The company's gross margin for the first three quarters was 48.97%, +4.11pct. We believe it was mainly due to an increase in the share of the industrial sector with high gross margin; the sales/management/R&D expenses ratio was 26.29%/6.14%/1.76%, respectively, +1.18/+1.75/+0.27pct; the increase in management expenses was clearly mainly due to a year-on-year increase in brand building fees, consulting fees, and employee remuneration. At the same time, the company repurchased restricted stocks that did not meet the unlocking conditions, which overtook amortization expenses.

The commercial sector is being divested, which will help resolve the problems of peer competition between listed companies and controlling shareholders, enhance the profit indicators of listed companies, and further develop the scale effect of the commercial sector. The company plans to use all of the shares in its wholly-owned subsidiary pharmaceutical company (that is, commercial sector business) to be incorporated into Taiping Company, a wholly-owned subsidiary of the company's controlling shareholder, in the form of a capital increase. After the capital increase was completed, the company held 43.35% of Taiping's shares, the pharmaceutical group held 56.65% of Taiping's shares, and Taiping held 100% of the pharmaceutical company's shares. The bill was reviewed and passed by the first Extraordinary General Meeting of Shareholders in 2024.

The proposed transfer of 13% of the shares held by Tianjin SmithKline is conducive to increasing the company's cash inflow and is in line with the company's development ideas focusing on the main business. The capital obtained from the transaction can be used to expand the company's business. The company plans to transfer 13% of its shares in Tianjin Schmke to Helion (China). At the same time, the company's controlling shareholder transferred 20% of its shares in Tianjin Schmke to Helion (China). After the equity transfer transaction is completed, the company's shareholding ratio of Tianjin Smike will be changed to 12%, and the shareholder structure of Tianjin Smike will be changed to Haleon UK Services Limited (i.e. “Helion (UK)”) holding 55% of shares, Helion (China) holding 33% of shares, and the company holding 12% of shares. According to the company's preliminary estimates, the transaction is expected to increase the net profit of the transaction by about 1.44 billion yuan after income tax in the fiscal year.

Maintain a “buy” rating. Without considering the impact of the divestment and transfer of shares in Tianjin Smike from the commercial sector, we expect net profit to be 0.954/1.104/1.271 billion yuan in 2024-2026, -3.36%/+15.80%/+15.12%, EPS is 1.24/1.43/1.65, and the corresponding PE is 26.72x/ 23.07x/20.04x. Considering the company's deep brand heritage and channel vitality given by marketing transformation, it maintains a “buy” rating.

Risk warning: risk of policy adjustments, risk of cost fluctuations, risk of core products falling short of expectations