Key points of investment

Pearl Group released its 2024 mid-year report. In the first half of the year, it achieved revenue of 6.282 billion yuan, a year-on-year decrease of 6.09%, and realized net profit attributable to mother of 1.171 billion yuan, an increase of 3.21% over the previous year, and achieved net profit without deduction of 1.155 billion yuan, an increase of 5.65% over the previous year. The company achieved revenue of 3.04 billion yuan in the second quarter, a year-on-year decrease of 7.24%, and achieved net profit attributable to mother of 0.563 billion yuan, an increase of 1.90% year-on-year, and realized net profit without deduction of 0.565 billion yuan, an increase of 7.91% over the previous year.

Overall operations are stable. We expect the company's chemical formulation business to achieve revenue of 3.224 billion yuan in the first half of the year, a year-on-year decrease of 7.37%. Among them, digestive tract products achieved revenue of 1.301 billion yuan, a year-on-year decrease of 19.96%, and gonadotropin products achieved revenue of 1.549 billion yuan, an increase of 12.51% over the previous year. We expect a slight reduction in the price of alprazole injections.

In the first half of the year, the API business achieved revenue of 1.761 billion, down 1.16% year on year, gross margin increased 0.51 percentage points year on year, and overall performance was stable. The traditional Chinese medicine business achieved revenue of 0.745 billion, a year-on-year decrease of 21.89%. We expect that the decline in 2024Q2 was narrower compared to Q1, mainly due to the high base of medicines for colds and fever in 2023H1.

Waiting for the transformation of BD and self-developed projects

The company previously introduced the PCAB drug JP-1366, which is expected to supplement digestive tract products; in the development of biological products, simeglutide has obtained clinical approval for weight loss. In preparation for phase III clinical trials, the phase III clinical study of the IL-17 antibody drug psoriatic head to head scuchiyou completed enrolling all patients at the end of April 2024. Subsequent BD and self-development are expected to enrich the company's product line with two-wheel drive.

Maintain an “increase in holdings” rating

We expect the company's revenue for 2024-2026 to be 13.163/13.947/14.875 billion, respectively, with year-on-year growth rates of 5.90%/5.95%/6.66%, net profit to mother of 2.196/2.456/2.7 billion, year-on-year growth rates of 12.41%/11.84%/9.95%, EPS 2.37/2.65/2.92 yuan/share, respectively, and a 3-year CAGR of 1.38%. In view of the company's steady profit performance and high dividend rate, the “Overweight” rating was maintained.

Risk warning: Iprazole sales fall short of expectations; API expansion falls short of expectations; risk of increased competition in self-avoidance and weight loss markets