Key points of investment

Incident: In 2023, the company's revenue was 1,629 billion yuan (-9.12%, down 9.12% year on year, same below), net profit attributable to mother was 187 million yuan (-34.64%), after deducting non-return net profit of 134 million yuan (+25.35%).

In the Q4 quarter, the company achieved revenue of 414 million yuan (-4.77%), net profit of 45 million yuan (+69.87%), and net profit of non-return to mother of 12 million yuan (-66.09%). In Q1 2024, the company achieved revenue of 438 million yuan (+0.37%), net profit of 70 million yuan (+10%), and net profit of non-return to mother of 54 million yuan (+9.6%). The performance exceeded our previous expectations on the profit side.

338 Strategic products have been released steadily, and innovative varieties of traditional Chinese medicine have performed brilliantly. Throughout 2023, the company's revenue side declined. Part of the reason was that Baijun Medical was no longer included in the scope of the consolidated statement in October 2022. Excluding this factor, the company's revenue remained basically flat in 2023. The decline in net profit to the mother was mainly due to the large investment income brought about by the transfer of part of the shares in 2022. By product, respiratory medication performed well. In 2023, Tengwangge Pharmaceutical achieved revenue of 180 million yuan (+28%), net profit of 33.24 million yuan, and profit reached a new high. Pediatric medication performance was outstanding, with revenue of 188 million yuan (+24.74%) for the full year of 2023, and gross margin increased by 0.97 pct compared to the same period in 2022. In 2023, pediatric Jingxing cough tablets have covered nearly 900 grade hospitals and about 400 primary hospitals, achieving revenue of nearly 60 million yuan; revenue from lysine vitamin B12 granules increased 20% year-on-year.

Xuanqi Health Bone Tablets covered nearly 500 grade hospitals throughout 2023, achieving revenue of 32 million yuan. Garcinia Cambogia has already been collected. The product has dropped significantly, showing a trend of price reduction and increase. In 2023, the company's net interest rate after deduction increased to 8.2% (+2.26pct, up 2.26 percentage points from the same period last year, same below). In Q1 2024, orthopedic drug revenue was 90 million yuan (+15.69%), and cardiovascular medicine achieved revenue of 112 million yuan (+44.28%), showing impressive results. There has been a decline in respiratory and anti-infective medications. Up to now, the raw materials for strong loquat cream/lotion are in place, and it is expected to resume a good growth trend throughout the year. Based on changes in product structure, the company's industrial gross margin increased to 76.59% (+5.64pct) in Q1 in '24.

Focus on investment in R&D and innovation to reserve medium- to long-term growth momentum. In 2023, the company's R&D investment increased 53% year over year, and in Q24 it increased 48% year over year. The company has a rich pipeline of reserves, and phase II clinical research on Hirulong tablets is progressing smoothly; Nolitong tablets are undergoing phase III clinical trials; Nolitong tablets are undergoing long-term toxicity tests; clinical trials of new pediatric Jingxing cough tablets for adults are progressing smoothly (330 cases have been enrolled in phase II during the reporting period); hemostatic and pain relieving granules are under pharmaceutical research, and Yiqi tumor reduction granules have been declared for clinical trials in April 2024. The “combination of innovation and simulation” product cluster reserve and R&D strategy has paid off.

Profit forecast and investment rating: Considering the optimization of the company's product structure, we raised our 2024-2025 net profit forecast from 237/310 million yuan to 2.42/312 million yuan. The 2026 forecast is 396 million yuan, and the PE corresponding to the current market value is 20/16/13X. Maintain a “buy” rating.

Risk warning: Risk of product release falling short of expectations, risk of failure in developing new products, risk of raw material price increases exceeding expectations, policy risks.