Incident: In the first three quarters of 2024, the company achieved operating income of 1.069 billion yuan, an increase of 1.28% year on year; net profit to mother was 0.158 billion yuan, an increase of 0.09% year on year. Among them, 2024Q3 revenue was 0.331 billion yuan, down 1.19% year on year; net profit to mother was 0.046 billion yuan, down 0.97% year on year.

R&D expenditure increased year over year, and profitability was under pressure in the short term. In the first three quarters of 2024, the company's gross sales margin was 62.34%, a year-on-year decrease of 2.31 percentage points; the net sales margin was 13.03%, a year-on-year decrease of 0.67 percentage points. Among them, the gross profit margin for 2024Q3 was 61.37%, a year-on-year decrease of 5.79 percentage points; the net sales margin was 12.06%, a year-on-year decrease of 0.31 percentage points. Affected by factors such as slow recovery in market demand and pressure on new product sales, the company's revenue and profit declined slightly in the third quarter. On the cost side, the sales/management/R&D expense ratios for the first three quarters of 2024 were 34.53%/4.40%/9.40%, respectively, -1.72/-0.04/+2.24 percentage points year-on-year, respectively.

ZG-001 completed phase 1 clinical trials, taking an important step in self-development transformation. Currently, the company is simultaneously promoting various innovative drug research projects: 1) Qianqing Granules, a Class 1 innovative Chinese medicine, is currently undergoing clinical phase 2 trials; 2) Phase 1 clinical trials of ZG-001 have been completed, and ZG-002 has been approved for clinical trials; 3) ZY-022 has completed pre-clinical research, and ZY-023 and ZY-025 are currently advancing various pre-clinical research work according to plan.

ZG-001 is a new class 1 drug intended to treat depressive disorders in adults, including major depressive disorder (MDSI) or refractory depression (TRD) or major depressive disorder (MDD) with suicidal ideation or behavior.

Preclinical studies have shown that the mechanism of ZG-001's antidepressant effects is clear. Test data shows that ZG-001 can rapidly increase brain ptrKB expression and activate the Bdnf-TrkB signaling pathway after a single oral administration, thereby exerting a rapid and long-lasting antidepressant effect. The results of this phase 1 clinical study showed that ZG-001 had excellent safety, and there were no adverse effects above grade 1. ZG-001 has excellent pharmacovigilance, rapid absorption, and exposure increases linearly with increasing dosage; there is no significant gender difference and no accumulation.

Investment advice: Industry sentiment was under pressure in the first three quarters, and revenue and profit growth fell short of expectations. The pace of R&D output remains stable, and self-developed innovative drugs are progressing steadily. In the future, as in-hospital demand recovers, performance growth is expected to return to the right track. We expect the company's net profit to be 0.221/0.248/0.279 billion yuan in 2024-2026. The predicted PE corresponding to the current stock price is 17/15/13 times, maintaining a “buy” rating.

Risk warning: drug development risk, national centralized drug procurement risk, consistency evaluation risk, business violation risk, dealer management risk, product cooperative research and development risk