Description of the event

Xianle Health announced its 2024 three-quarter report. The company's total revenue for 2024Q1-3 was 3.048 billion yuan (+21.8% YoY); net profit to mother was 0.24 billion yuan (+29.52% YoY), after deducting non-net profit of 0.236 billion yuan (+28.11% YoY). Looking at 2024Q3 alone, the company achieved total operating income of 1.058 billion yuan (+10.43% YoY); net profit to mother of 85.3283 million yuan (+1.63% YoY), after deducting non-net profit of 81.8877 million yuan (-4.62% YoY).

Incident comments

l Business is under pressure due to channel adjustments in the Chinese market, and overseas business continues to grow at a high rate. Compared to 2024Q2, 2024Q3's revenue growth rate declined month-on-month. It is expected to be mainly due to the weak performance of some pharmaceutical brand customers in the context of channel restructuring in the Chinese market. The company continues to promote the upgrading of the sales team, reorganize the sales team according to customer types, and is expected to enhance the competitiveness of the domestic market in the future. Looking at other regions, overseas business regions are expected to maintain healthy growth, mainly due to the company's North American team integration, BF production line adjustment, European packaging production line commissioning, and the execution of orders from Asia-Pacific customers.

l Fluctuations in gross margin may be affected by a single quarter, and the expense ratio for the first three quarters was relatively stable. The company's 2024Q1-3 net profit margin increased 0.47 pct to 7.87% year on year, with gross margin +1.06 pct to 31.21% year on year, sales expenses ratio (+0.23 pct year on year), management expenses ratio (year on year -0.07 pct), R&D expenses rate (+0.22pct year over year), financial expenses ratio (+0.76pct year on year), sales tax and surcharges (+0.09pct year over year). Looking at 2024Q3 alone, the company's net profit margin fell 0.7 pct to 8.07% year on year, with gross margin -1.65 pct to 29.63% year on year, sales expenses ratio (-0.14 pct year over year), management expenses ratio (+ 1.03 pct year over year), R&D expenses rate (-0.06 pct year over year), financial expenses ratio (+0.9 pct year over year), sales tax and surcharges (+0.15 pct year over year). The company's gross margin declined in 2024Q3, which is expected to be mainly due to the quarterly impact of order fulfillment and the drag on order structures in some regions. The increase in financial expenses is expected to be mainly due to interest on convertible bonds, interest on external loans, and exchange gains and losses.

l In the short term, against the backdrop of pharmacy channel adjustments and further acceleration of online growth in the domestic health products market, the company's overseas and domestic business performance is divided. In response to related issues, the company has made breakthroughs from the perspective of sales team, cost control, etc., and it is expected that related business performance will be optimized. At the same time, the company's overseas layout related strategies continue to advance, and it is expected that the overseas business is receiving good orders. In the long run, the global health products market is still at the stage of high-quality development. With the further deepening of the company layout, we expect to see a further increase in the global market share of leading Chinese health products CDMO. The company is expected to achieve net profit of 0.361/0.437/0.529 billion yuan in 2024/2025/2026, corresponding EPS of 1.53/1.85/2.24 yuan, and corresponding valuations of 17/14/12 times, respectively, maintaining a “buy” rating.

Risk warning

1. The risk of slow recovery in demand;

2. Industry competition further exacerbates risks;

3. Risk of changes in consumer consumption habits, etc.