Key points:

The three-quarter report performed well, and the trend of positive performance continued

The company achieved revenue of 2.045 billion yuan in the first three quarters of 2024, up 39.59% year on year; realized net profit of 0.421 billion yuan, up 46.93% year on year; gross profit margin of 61.61%, down 7.04 pct year on year; and net profit margin of 20.90%, up 0.93 pct year on year. Looking at a single quarter, Q3 achieved revenue of 0.617 billion yuan, up 35.97% year on year; net profit to mother of 0.125 billion yuan, up 40.61% year on year; gross margin was 59.25%, down 7.91 pct year on year; and net margin was 20.68%, up 0.66 pct year on year. Looking at the cost rate for the period, in the first three quarters of 2024, the company's cost rate for the period (including R&D expenses) was 39.39%, down 9.25 pcts year on year. Among them, the sales expense ratio dropped the most, with a year-on-year decrease of 7.36 pcts. Changes in the company's business structure (increase in revenue share of low-gross margin traditional Chinese medicine formula granules and Chinese medicine tablets) were compounded by a reduction in the collection price of Wuling capsules and Bering tablets in some regions, leading to a decline in overall gross margin, but continued good fee control effects led to a year-on-year increase in net interest rate.

Core products maintain a rapid growth trend

By product, in the first three quarters, sales revenue of the Wuling series increased 24.88% year on year. Among them, sales of Wuling capsules and Lingze tablets increased by 30.24% and 37.05% respectively, and sales revenue increased by 22.67% and 36.90% respectively. Sales volume of Bering films increased 22.14% year over year. Due to the reduction in collection prices, sales revenue fell 4.89% year on year. The continued narrowing of the decline showed the restorative growth of Bering tablets. In addition, sales revenue of Chinese medicine tablets increased by 51.24% year on year, and sales revenue of traditional Chinese medicine formula tablets increased sharply by 175.96% due to an increase in the number of varieties registered under national standards and provincial standards. Overall, the company's core product, the Wuling series, continues to maintain a relatively rapid growth trend, and a new performance growth trend for Chinese medicine tablets and formula granules has taken shape.

The secondary development of Wuling capsules and the use of collection of Bailing capsules are expected to bring about further growth in performance. Wuling capsules are the company's exclusive product and a new type of national traditional Chinese medicine. They are pure Urex powder formulations, mainly containing adenosine, polysaccharides, sterols, amino acids, and rich vitamins and trace elements. They have been on the market for more than 20 years. The company is currently carrying out the second development of Wuling capsules to treat Alzheimer's disease, focusing on research on cognitive dysfunction (MCI) in young and old people. Through grassroots public welfare activities, MCI patients can use Wuling capsule treatment alone or in combination to prevent or delay the occurrence of AD, giving full play to the advantage of “not treating the disease.” In addition, Bailing Capsule has completed the networking process in 29 provinces, cities, and autonomous regions. The company will seize the time window for collection by the Hubei Alliance, increase market expansion efforts, and carry out omni-channel sales within the hospital, OTC, and the Internet. The secondary development of Wuling capsules and the use of collection by Bailing capsules to explore the market are expected to bring further growth in the company's performance.

Equity incentives highlight the company's confidence in development

The company issued the “2024 Restricted Equity Incentive Plan (Draft)”. The first incentive target to be granted is 112 people, including company directors, executives, core marketers, core technical personnel, and other key employees. The restricted shares will be awarded no more than 6.605 million shares, accounting for about 0.94% of the total share capital on the announcement date, at a grant price of 8.07 yuan/share. The performance assessment target is based on 2024 net profit, with net profit growth rates of not less than 30%, 66%, and 110% in 2025, 2026, and 2027. Equity incentives and assessment targets demonstrate the company's confidence in future development.

Investment advice

We are optimistic about the company mainly because: First, the company's core products have a clear competitive advantage. The main product, Wuling capsules, is one of the traditional Chinese medicines with a clear mechanism of action. The three products brought hospital-side increases, sales models combining self-management, investment, and OTC sales models, and the layout of new channels such as Internet+ medical care and e-commerce, seize the development opportunities brought by the company; second, the upgrading of the company's marketing strategy has brought benefits to the company's core products, and the traditional Chinese medicine tablets and Chinese medicine tablets that the company has already laid out in advance side The granular business brings a lot of room for growth. In view of the company's third-quarter performance exceeding expectations and equity incentive targets, we raised the company's profit forecast. The company's revenue for 2024-2026 is estimated to be 2.596/3.206/3.811 billion yuan (previous value was 2.388/2.926/3.503 billion yuan), net profit to mother of 0.534/0.713/0.912 billion yuan (previous value was 0.498/0.643/0.794 billion yuan), and EPS was 0.76/1.02/1.30, respectively. Maintain the company's “buy” rating.

Risk warning

1. The company's marketing strategy fell short of expectations;

2. Risk of price reduction in collection.