Incident: The company released its 2024 three-quarter report. The first three quarters of 2024 achieved operating income of 0.646 billion yuan (-10.24%), net profit attributable to shareholders of listed companies was 0.113 billion yuan (-23.99%), and deducted non-net profit attributable to shareholders of listed companies was 0.106 billion yuan (-23.43%).

Sales models are changing, and short-term profits are under pressure. In the 3rd quarter of 2024, the company's sales expenses ratio was 53.30%, up 6.88pct year on year, and 3.10pct month-on-month, leading to profit fluctuations, mainly due to changes in management model. The company received some regional markets and amicably terminated marketing management services with promotion service providers, resulting in a decline in profits due to market handover fees. As of mid-2024, the company has implemented marketing transformation and empowered affiliate dealers in more than 10 selected provinces. We believe that changes in sales models will have a certain impact on product sales and cost control in the short term, but in the long run, it will help improve the efficiency of the sales system and gradually drive an increase in profit margins.

Innovative drug research and development continues to advance, and pipeline value continues to increase. In terms of innovative drug development, KC1036 single-agent treatment of advanced esophageal squamous cell carcinoma and first-line clinical research on KC1036 combined with PD-1 antibodies to maintain locally advanced or metastatic esophageal squamous cell carcinoma are progressing steadily; after reaching the main clinical end point, ZY5301 (Jincao tablets) is continuing to push forward the application for marketing. As R&D progresses steadily, the company is expected to usher in a cash out period of innovative drugs in the next 1-3 years.

Profit forecasting and valuation. Based on recent business conditions, we adjusted our profit forecast. We expect the company's revenue from 2024 to 2026 to be 0.952 billion yuan, 1.068 billion yuan, and 1,230 million yuan, respectively, with year-on-year growth rates of 3.5%, 12.1%, and 15.2%, respectively; net profit to mother of 0.13 billion yuan, 0.158 billion yuan, and 193 million yuan, respectively, with year-on-year growth rates of -13.3%, 20.9% and 22.4%, respectively. In price calculation, the corresponding PE is 31.0 times, 25.6 times, and 20.9 times, respectively. Considering that the company's profit is expected to reach an inflection point, innovative drug research and development continues to advance, maintaining a “buy” rating.

Risk warning: The price reduction in the “Su Ling” medical insurance renewal negotiations exceeded expectations; the progress of new product release/approval was lower than expected; and the marketing model reform effect fell short of expectations.