Key investment points

Judging from the Q3 data, the company's profitability has stabilized at a new level, and the company's promotion hierarchy is gradually forming, which will further enhance the company's performance. Driven by the implementation of mining, marketing reforms, and off-campus disbursements, I am optimistic that the company's net interest rate will continue to increase.

Performance: Revenue grew steadily, profit growth exceeded expectations

2024Q1-Q3 achieved revenue of 2.146 billion yuan (+13.36% year over year), net profit of 0.45 billion yuan (year-on-year increase of 45.08%), and net profit after deduction of 0.418 billion yuan (+44.84% year over year).

Looking at 2024Q3 in a single quarter, the company achieved revenue of 0.78 billion yuan (+15.47%), net profit to mother of 0.166 billion yuan (year-on-year increase of 47.38%), and net profit of 0.163 billion yuan after deducting non-return to mother (+47.37% year over year). The company's revenue grew steadily, and profit growth exceeded expectations.

Growth analysis: the pasting echelon is gradually becoming richer, laying the foundation for sustainable growth

1) Paste: Self-developed and purchased two-wheel drive, and the product echelon gradually formed ① loxoprofen sodium gel paste: According to the customs records, up to now, the remaining 4 regions (Beijing, Shanghai, Shandong, Hubei) of loxoprofen sodium gel paste have not been collected, and the remaining 2 regions (Heilongjiang and Tibet) that have already been collected and won the bid have not been implemented. Driven by “accelerated collection and release” and “out-of-hospital market expansion”, we are optimistic about the continued release of loxoprofen sodium gel patch.

② Ketoprofen gel patch: Currently in the early stages of release, 2024H1 achieved sales of 21.68 million yuan. Based on the fact that this variety is an exclusive variety and has been included in the medical insurance catalogue, we believe that future sales of this product are expected to continue to grow rapidly.

③ Anti-inflammatory and pain-relieving bath cream: This variety was purchased at the Shanghai Health Materials Factory. According to the customs records, the product will be marketed and sold within the year, and early sales will focus on pharmacy chains and clinics.

④ New paste products will be launched one after another: According to estimates when the NDA was submitted, we expect indomethacin gel patches and flurbiprofen gel patches to be approved for sale in 2025. The company will gradually form a matrix of topical analgesic paste products to establish future growth.

2) Oral formulations: According to the company's announcement, the key varieties approved for marketing by the company in 2024 are: evastine oral solution: used to treat allergic rhinitis. It was first modeled in China, and the original research was not marketed domestically. Ambroxol hydrochloride oral solution: National sales exceeded 0.8 billion yuan in 2023. Indobufen tablets: National sales exceeded 1.5 billion yuan in 2023. We believe that the launch of the above products will further enrich the company's oral formulation product matrix, and we are optimistic about the steady growth of the oral formulation sector.

3) Raw materials and plant extracts: According to the company's 2024 interim report, the company already has 85 types of raw materials, 92 types of excipients, and more than 15 varieties of APIs under development, laying the foundation for the continuous and steady growth of the company's raw materials sector.

Profitability analysis: Profitability has stabilized to a new level

2024Q1-Q3 has a gross sales margin of 73.76% (YoY -4.23pct) and a net sales margin of 20.96% (YoY +4.58pct). Looking at the cost ratio, the sales cost ratio is 39.85% (year-on-year -6.73 pct), and the R&D cost ratio is 7.8% (-0.51 pct year over year).

2024Q3 has a gross sales margin of 74.85% (-3.6pc year on year) and a net sales margin of 21.24% (+4.6pct year on year). Looking at the cost ratio, the sales expense ratio was 39.61% (-3.11pct year on year), and the R&D cost ratio was 6.85% (year-on-year -2.98pct).

The company's sales expenses rate dropped significantly. According to the company's customs investment activity record table, there are three main factors:

① Loxoprofen sodium gel patches have been implemented one after another in collection areas, reducing some sales expenses; ② the company's marketing model has been transformed, and the cost rate has been effectively controlled; ③ the share of the out-of-hospital market has increased. The above factors are all long-term, and Rosso's share of out-of-hospital revenue is expected to continue to increase in the future, so we are optimistic about the continuation of the increase in the company's net interest rate.

Management quality analysis: Under the convergence of business, I am optimistic about improving operational efficiency

2024Q1-Q3 achieved a net operating cash flow of 0.602 billion yuan (+55.47% year over year) and a receivables turnover ratio of 4.43, an increase of 0.39 over the previous year. According to the customs record sheet, by promoting commercial consolidation and strengthening centralized distribution and supplier negotiations, the above measures have effectively improved the company's operating efficiency and cash flow situation.

Profit forecasting and valuation

Considering the optimization of the company's expense ratio and the continued increase in profitability, we raised the company's profit forecast. The company's revenue for 2024-2026 was 3.069/3.624/4.288 billion yuan, EPS was 1.08/1.37/1.73 yuan respectively. The previous forecast was 1.04/1.36/1.73 yuan, respectively. The closing price on November 7, 2024 corresponds to 21.6 times the 2024 PE. Considering the gradual diversification of the company's paste products and the increasing sustainability of the company's net interest rate, the “buy” rating was maintained.

Risk warning

Risk of product sales falling short of expectations, risk of R&D failure, risk of increased industry competition