Incidents:

On April 19, 2024, the company released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 1,629 billion yuan, a year-on-year decrease of 9.12%, achieved net profit of 187 million yuan, a year-on-year decrease of 34.64%, and realized deducted non-net profit of 134 million yuan, an increase of 25.35% over the previous year. In 2024, Q1 achieved operating income of 438 million yuan, a year-on-year increase of 0.37%, achieved net profit of 70 million yuan, an increase of 10.04% over the previous year, and achieved deducted non-net profit of 54 million yuan, an increase of 9.61% over the previous year.

Revenue from the pharmaceutical industry remained basically the same year on year, mainly due to the reduction in collection prices.

Excluding the impact of Baijun Medical's announcement in October 2022, the company's revenue was basically the same in 2023. Among them, the pharmaceutical industry achieved revenue of 1,439 billion yuan, a year-on-year decline of 0.27%. The company's revenue remained flat in Q1 in 2024. Among them, the pharmaceutical industry achieved revenue of 397 million yuan, an increase of 1.31% over the previous year. Looking at key drug use areas, cardiovascular and skeletal muscle experienced a year-on-year decline in 2023 due to a reduction in collection prices. Q1 of 2024 already bottomed out; respiratory demand was strong, limited by raw poppy shells, and normal production and sales have now resumed. Looking at specific categories, the collected varieties are showing a trend of “volume increase and price reduction”. Innovative Chinese pharmaceutical varieties are in a period of rapid release, and the growth rate is the most impressive.

(1) Cardiovascular: In 2023, sales revenue for cardiovascular and cerebrovascular disease drugs was 385 million yuan, down 14.34% year on year, mainly because the core variety Ezmeibu tablets were affected by the reduction in collection prices and experienced a sharp year-on-year decline. Hessuketon tablets increased by more than 20% year on year. In 2024, sales revenue for cardiovascular and cerebrovascular diseases was 112 million yuan, an increase of 44.28% over the previous year, and completed a bottoming rebound. Among them, sales revenue of ezetimib tablets was about 67 million yuan, an increase of about 115% over the previous year.

(2) Skeletal muscle: In 2023, the sales revenue for skeletal and muscular system drugs was 359 million yuan, down 2.34% from the previous year, mainly because the core variety Garcinia Cambogia Bone tablets were affected by the reduction in collection prices and experienced a sharp year-on-year decline. The innovative traditional Chinese medicine Xuanqijian Bone Tablets covered nearly 500 grade hospitals, with sales revenue of about 32 million yuan in the first year of medical insurance. In 2024, Q1 orthopedic muscular system drug sales revenue was 90 million yuan, an increase of 15.69% over the previous year. Among them, garcinia huangjian bone tablets have been fully collected, and the unit price of the product has dropped significantly, but sales volume increased 16.12% year on year. The innovative traditional Chinese medicine Xuanqijian Bone tablets added about 90 new coverage levels and about 50 primary hospitals, achieving sales revenue of about 21 million yuan, an increase of over 850% year on year.

(3) Respiration: In 2023, sales revenue for respiratory drugs was 180 million yuan, up 27.96% year on year. The main contribution came from the subsidiary Tengwangge Pharmaceutical. Among them, Strong Loquat Cream (Honey) increased by more than 20% year on year, and Strong Loquat Lotion increased by more than 80% year on year. Respiratory drug sales revenue in the first three quarters of 2023 reached 156 million yuan, an increase of 65.52% over the previous year. Due to the failure to add the core raw material poppy shell in a timely manner, it had an impact on the company's 2023 Q4 and 2024 Q1. In 2024, Q1 respiratory drug sales revenue was 71 million yuan, down 20.82% year on year. As of the release date of the annual report, raw materials were in place, and normal production and sales had been achieved. We expect normal growth to resume in Q2-Q4.

(4) Children: In 2023, sales revenue for children was 188 million yuan, an increase of 24.74% over the previous year. Among them, the innovative traditional Chinese medicine Pediatric Jingxing cough tablets covered nearly 900 grade hospitals and about 400 primary hospitals, and achieved operating income of nearly 60 million yuan during the year, setting a new high annual sales revenue. The sales revenue of lysine vitamin B12 granules increased by more than 20% year on year. In 2024, Q1 children's drug sales revenue was 46 million yuan, down 4.07% year on year. Among them, innovative traditional Chinese medicine pediatric Jingxing cough tablets added about 40 new coverage levels of hospitals and about 40 primary hospitals, achieving sales revenue of about 22 million yuan, an increase of more than 230% over the previous year.

Implementing the “denuclearization” development strategy has led to a significant increase in deducted non-net profit.

The company effectively implements the “denuclearization” development strategy, focusing on the development of the main business, and is committed to becoming a health industry group with innovative Chinese medicine products as the core. Over the past few years, it has successively sold subsidiary/grandson companies such as Baijun Medical, Hengxing Pharmaceutical, and Xinpan Biotech, etc., gradually divested non-core assets, while continuously reducing losses of non-main businesses by improving quality and efficiency. For example: in 2023, Shino Panda Pharmaceutical had a net loss of 2.43 million yuan, a decrease of 4.1 million yuan compared to 2022; in 2023, Ruixin Pharmaceutical had a net loss of 3.33 million yuan compared with 394 million yuan compared to 2022 10,000 yuan. The company proposed the “338 Major Product Development Plan” -- striving to build 3 1 billion products, 3 500 million products, and 8 products exceeding 100 million in the next 5-10 years. Most products in the company's “338 Product Development Plan” will maintain a steady growth trend in 2023. The implementation of the “denuclearization” development strategy has led to a significant increase in the company's deducted non-net profit. In 2023, the company's deducted non-net profit increased 25.35% year on year, and in 2024, the company's deducted non-net profit increased 9.61% year on year. It insisted on investing in traditional Chinese medicine innovation and strengthened the R&D pipeline layout.

The company takes “innovative traditional Chinese medicine” as its development direction. Over the past few years, it has successively completed the approval and marketing of Class 1.1 innovative traditional Chinese medicine medicines, such as Jingxing Cough Relief Granules for Children and Xuanqijian Bone Tablets, and quickly achieved sales volume. The company attaches great importance to R&D investment. The R&D investment amount reached 108 million yuan in 2023, an increase of 53.31% over the previous year, accounting for 6.63% of revenue. By the end of 2023, the company's R&D pipeline was well-stocked, and some projects had already entered the middle and late stages of clinical trials: Noriton granules had completed phase III clinical trials; gastric pain relievers were undergoing phase III clinical trials; phase II clinical studies of Zhilong Tongluo tablets were progressing smoothly; phase II clinical trials for the addition of pediatric Jingxing cough tablets for adult use were progressing smoothly (330 cases have been enrolled); pharmaceutical research on hemostatic and analgesic granules was being declared for clinical trials in April 2024. We believe that the company is a leading innovative Chinese medicine enterprise in China. It has a mature traditional Chinese medicine research and development system and rich R&D pipeline reserves, which is the foundation for the company's long-term growth.

Investment advice:

Based on the company's development plan, we assume that the company's pharmaceutical industry revenue growth rate from 2024 to 2026 is 15%, 15%, and 15%, respectively, the medical service revenue growth rate is 5%, 5%, and 5%, respectively, and the pharmaceutical business revenue growth rate is 5%, 5%, and 5%, respectively. Based on the above assumptions, we expect the company's revenue from 2024 to 2026 to be 1,860 million yuan, 2.125 billion yuan, and 2,429 billion yuan, respectively, and net profit to mother of 239 million yuan, 290 million yuan, and 348 million yuan respectively. Considering the company's clear development strategy and outstanding growth, a PE valuation of 25 times in 2024 was given, corresponding to a 6-month target price of 13.50 yuan, and an investment rating of buy-A was given.

Risk warning: risk of price fluctuations of Chinese herbal medicines, risk of R&D project failure, risk of price reduction in proprietary Chinese medicine & chemical medicine collection.