Event

The company issues its 2022 half-yearly results report

On the evening of August 24, the company released its annual performance report for 2022. In 2022, H1 realized an income of 3.015 billion yuan, an increase of 8.99% over the same period last year, a net profit of 452 million yuan, a decrease of 4.54% over the same period last year, and a net profit of 318 million yuan, an increase of 0.91% over the same period last year. the performance is in line with expectations.

Brief comment

The group's modern dosage form traditional Chinese medicine manufacturing platform, the epidemic affecting subsidiary performance company, was established in March 2000 by the spin-off of some excellent assets of Tongrentang shares, listed on the gem of the Hong Kong Stock Exchange at the end of October of the same year, and became a listed company on the main board of the Hong Kong Stock Exchange in 2010. As a modern Chinese medicine manufacturing platform of Tongrentang Group, the company specializes in the production of granules, water honey pills, tablets and soft capsules, involving more than 20 dosage forms and more than 200 varieties. the main products include Liuwei Dihuang pills, Ganmao Qingre granules, Ganmao soft capsules and Niuhuang jiedu tablets.

On the whole, the revenue of H1 company increased by 8.99% in 2022 compared with the same period last year, and still achieved relatively steady growth under the influence of the repeated epidemic situation, in which the parent company and domestic subsidiaries performed well, achieving 9.71% and 38.96% year-on-year growth respectively. The net profit of home ownership increased by 0.91% compared with the same period last year, and the slowdown in profit growth was mainly due to the fact that the company's consolidated statements were affected by the merger of subsidiary Tongrentang Sinopharmaceuticals, which dragged down the current performance; the operation of subsidiary Tongrentang Sinopharmaceuticals H1 was mainly affected by the epidemic in Hong Kong and Macao.

In 2022, Q2 company achieved 1.567 billion yuan in revenue, an increase of 10.97% over the same period last year, and its net profit was 157 million yuan, an increase of 8.65% over the same period last year. The growth rate of revenue and profit at both ends was higher than that of Q1, and the company's fundamental operation continued to improve. Mainly benefit from the company's active response to the impact of the epidemic, timely adjustment of production plans according to the epidemic situation, closed-loop production and other ways. At the same time, actively promote the development strategy of large varieties, reasonably arrange production resources according to sales, make every effort to ensure production and supply, and promote the gradual recovery of Q2 production and operation of the company.

The impact of the short-term epidemic can be controlled, and the fundamental operation is gradually improving.

On the whole, the impact of the epidemic on the company can be controlled as a whole. In the first half of the year, except that cold and heat-clearing products were affected by epidemic restrictions, Xihuang pills series withdrew from Beijing medical insurance, sales revenue declined in a short period of time, and other large varieties basically maintained good growth. Liuwei Dihuang Pill series, Jiawei Xiaoyao Pill series, Shengmai Yin series and Ejiao series increased by 17%, 66%, 26% and 30% respectively compared with the same period last year. In addition, driven by the development strategy of large varieties, the company's Niuhuang Jiangya Pill series, Zhibai Dihuang Pill series, Qiju Dihuang Pill series and other products have achieved double-digit year-on-year growth. We believe that as the epidemic situation in Shanghai and Beijing tends to ease and the epidemic control is gradually lifted, the company has gradually returned to normal production and operation, with the ninth edition of the epidemic prevention and control plan further emphasizing scientific and accurate prevention and control, offline drugstore control is gradually slowing down, restrictions on the sale of cold medicine are gradually relaxed, and it is expected that the company's fundamental business will continue to improve in the second half of the year.

Continue to promote the strategy of large varieties, and "Operation Huanghuang" ploughs deep into the channels.

In 2022, H1, the company sold more than 100 million varieties to 5, and sold more than 10 million varieties to 34. By combining different diseases and the health management needs of consumers, the company actively focused on key disease areas and combed and classified the varieties. Select varieties with high clinical efficacy value, continue to promote the strategy of "kidney disease, heart and brain, tonifying, lung-nourishing, anti-cancer, pediatric medicine" to promote the steady growth of core products. At the same time, the company also continues to tap the potential of the variety market, promote the transformation of the marketing model to the goal of faster, more flexible and more efficient, and launch the establishment of a terminal strategic alliance in March 2021. Further integrate the channel advantages of each terminal chain and the brand advantages of Tongrentang, and release the three-year action plan at the high-end summit of the terminal strategic alliance held in September of the same year, and launch the first batch of products of "Operation coruscate". Including Liuwei Dihuang pills, Jinkui Shenqi pills, Xihuang pills, Ganmao Qingre granules and other core varieties. Through the transformation of sales mode and packaging upgrading, the company reshapes the product channel image, deeply ploughs the channel, and adopts the "one product, one policy".

The differentiation strategy of "one product and three regulations" will create a new effect and is expected to further improve the market position and share of the company's core products.

The gross profit margin decreased slightly under the influence of rising costs, and the expense rate remained basically normal in 2022 H1. The company's comprehensive gross profit margin was 42.90%, a year-on-year decline of 2.25pp, mainly due to the rise in the cost of traditional Chinese medicine; the sales expense rate reached 16.47%, an increase of 0.23pp over the same period last year, and the management expense rate reached 7.51%, a decrease of 0.13pp over the same period last year, which remained basically stable. The turnover of accounts receivable decreased from 6.88 at the end of 2021 to 6.61 of H1 in 2022, and the inventory turnover increased from 1.94 at the end of 2021 to 2.06 of H1 in 2022. The level of accounts receivable and inventory turnover remained basically stable; other financial indicators were basically normal.

Profit forecast and investment rating

We believe that the company relies on the century-old brand of Tongrentang, which is rich in variety resources and deep business barriers. With the continuous promotion of the company's large variety strategy and marketing reform, it can ensure the long-term and steady growth of the company. We estimate that the company's operating income from 2022 to 2024 will be 5.932 billion yuan, 6.675 billion yuan and 7.528 billion yuan respectively, and its net profit will be 557 million yuan, 625 million yuan and 702 million yuan respectively, equivalent to 0.43 yuan per share, 0.49 yuan per share and 0.55 yuan per share respectively, representing year-on-year increases of 9.8%, 12.1% and 12.3% respectively. The corresponding PE is 12.3,10.9 and 9.7 respectively, covering it for the first time and giving it a "buy" rating.

Risk hint

Repeated epidemic situation; marketing reform is not up to expectations; drug collection risk; drug price reduction risk; raw material price fluctuation risk.