Incident: The company released its 2024 three-quarter report. 2024Q1-3 achieved operating income of 2.146 billion yuan, a year-on-year increase of 13.36%, net profit of 0.45 billion yuan, a year-on-year increase of 45.08%, after deducting non-return net profit of 0.418 billion yuan, a year-on-year increase of 44.82%. Profit exceeded our expectations. 24Q3 achieved revenue of 0.78 billion yuan, a year-on-year increase of 15.47%, net profit to mother of 0.166 billion yuan, a year-on-year increase of 47.38%, after deducting non-return net profit of 0.163 billion yuan, an increase of 47.37% year-on-year.

Q3 Strong performance growth and steady improvement in profitability. By business, in 24Q3, 1) the topical formulation sector achieved revenue of 0.462 billion yuan, an increase of 15.57% year on year; 2) the oral formulation sector achieved revenue of 0.187 billion yuan, an increase of 2.33% year on year; 3) the raw materials and plant extract sector achieved revenue of 0.124 billion yuan, an increase of 49.62% year on year. Net profit for 24Q3 increased 47% year-on-year. The high increase was mainly due to rapid release of the core product Rosso after harvesting and falling sales expenses. The gross margin of the 24Q3 company was 74.85% (-3.60pct year on year), and the cost ratio for the period decreased significantly. Among them, the sales/management/R&D/finance expense ratios were 39.61% (y-3.11pct), 2.62% (-0.72pct), 6.85% (y-2.98pct), and 0.49% (year-on-year +0.20pct), respectively.

The amount of paste in hospitals continues to be released, and it is growing rapidly outside the hospital. 24Q1-3 paste achieved revenue of 1.169 billion yuan, up 6.46% year on year, and sales volume increased 60.63% year on year, mainly due to continued in-hospital volume, rapid growth outside the hospital, and increased contribution from new products. 24Q3 paste achieved revenue of 0.462 billion yuan, up 15.57% year on year. Among them, in-hospital revenue increased 8.47% year on year, and out-of-hospital revenue increased 113.49% year on year. Among them, 1) The core product loxoprofen sodium gel patch has been collected at the provincial level in more than 20 administrative regions, and is expected to continue to be released in hospitals; at the same time, growth outside the hospital is strong. As of 24M9, it has successfully developed a target chain of 450 companies, covering nearly 0.12 million stores. 2) The revenue of ketoprofen gel patch 24Q3 increased by more than 60% compared to 24Q2. As of 24M9, nearly 2,000 terminals have been developed.

A matrix of topical cream products has been created, and several new products are about to be launched. The company continues to increase its layout in the field of gel patches. The 24Q1-3 development cost reached 0.167 billion yuan (+6.40% compared to the same period). Currently, it is developing a number of topical formulation products. It is expected that indomethacin gel patches and flurbiprofen gel patches will be approved in 2025, and products such as loxoprofen sodium patches, ketoprofen patches, and flurbiprofen patches will be approved in 2026. In addition, the company is expected to start selling anti-inflammatory and pain-relieving balms imported from outside at 24M11, contributing new growth to the company.

Profit forecast and rating: We expect net profit to be 0.529, 0.69, and 0.863 billion yuan for 24/25/26, respectively, up 44%, 30%, and 25% year-on-year. The PE corresponding to the current stock price is 22X, 17X, and 13X, respectively. Considering that the company is a leading domestic paste company, the product portfolio continues to expand and maintain a “buy” rating.

Risk warning: Risk of sales falling short of expectations; competition increasing risk; risk of R&D progress falling short of expectations.