In the first three quarters of 2024, the company achieved revenue of 2.715 billion yuan, a year-on-year decrease of 2.31%; net profit to mother was 0.168 billion yuan, a year-on-year decrease of 14.64%; net profit after deducting non-return to mother was 0.162 billion yuan, a year-on-year decrease of 14.19%. Among them, in 2024Q3, the company achieved revenue of 0.79 billion yuan, a year-on-year decrease of 8.74%; net profit to mother was 0.05 billion yuan, a year-on-year decrease of 37.21%; net profit after deducting non-return to mother was 0.051 billion yuan, a year-on-year decrease of 33.82%.

The pharmaceutical industry achieved year-on-year growth, and the price of Chinese herbal medicines affected gross profit margins. In the first three quarters of 2024, the company's pharmaceutical industry achieved revenue of 1.409 billion yuan, a year-on-year increase of 4.65%, of which Chinese medicine business revenue was 0.72 billion yuan, down 1.89% year on year, and Western medicine business revenue was 0.688 billion yuan, up 12.48% year on year, maintaining steady growth. Due to factors such as rising Chinese herbal medicine prices, the pharmaceutical industry's gross margin for the first three quarters was 65.80%, a year-on-year decrease of 2.78 pct. The revenue from the pharmaceutical wholesale and retail business was 1.159 billion yuan, down 6.06% year on year, and gross margin was 18.09%, down slightly year on year. The Chinese herbal medicine and tablet production business achieved revenue of 0.059 billion yuan, a year-on-year decrease of 29.45%, and gross margin of 14.00%. The gross margin decreased a lot due to raw material prices.

The eight-year strategic plan has been promoted, and the R&D cost rate has increased. The company achieved an overall gross margin of 46.05% in the first three quarters of 2024, a slight decrease compared with the same period last year; sales expenses ratio/management expense ratio/R&D expenses were 24.17%/7.19%/5.32%, respectively, -1.08pct/+0.11pct/1.32pct. Among them, total R&D expenses for the first three quarters reached 0.144 billion yuan, an increase of 0.033 billion yuan over the previous year, increasing R&D investment intensity and advancing the implementation of the eight-year strategic plan target.

It is proposed to acquire shares in a small number of companies to increase the profits of listed companies. In September, the company announced that it plans to purchase 28.92% of the subsidiary Qianjin Xiangjiang Pharmaceutical's shares and 68.00% of Qianjin Xieli Pharmaceutical's shares through the issuance of shares and cash payment. After the transaction is completed, the listed company's shareholding ratio in Xiangjiang Pharmaceutical will increase from 51.00% to 79.92%, and the share holding ratio of Xiexiang Pharmaceutical will increase from 32.00% to 100.00%. This acquisition will help increase the listed companies' controlling interest in subsidiaries, increase net profit to mother, and facilitate the implementation of the “one main, two auxiliary” strategic plans.

Maintain an “overweight” investment rating. We believe that the company's current business operations are steady, and that medium- to long-term growth can be expected under the new strategic plan. Taking into account the cost of Chinese herbal medicines and increased R&D investment, the net profit for 2024-2026 is expected to be 0.29/0.32/0.38 billion yuan, an increase of -8.6%/9.5%/18.2% over the previous year. The corresponding PE is 19/17/14 times, maintaining an “increase” investment rating.

Risk warning: policy risk, R&D failure, increased market competition, risk of rising Chinese herbal medicine prices, etc.