Investment highlights:

Net profit to mother was +11.66% YoY in 24Q2. 2024H1 achieved revenue of 1.925 billion yuan (-22.15% YoY). The year-on-year decline in revenue was mainly due to revenue from the real estate business before divestment in the same period last year. Net profit to mother was 0.127 billion yuan (YoY -33.18%), net profit not attributable to mother was 0.112 billion yuan (YoY +77.19%). On a quarterly basis, Q1/Q2 achieved year-on-year revenue of -29.99%/-13.85%, net profit to mother of -54.35%/+11.66%, and net profit without return to mother +242.28%/+24.63% year-on-year, respectively. It is proposed to distribute a cash dividend of 0.5 yuan (tax included) for every 10 shares.

The cosmetics business grew steadily, and the pharmaceutical and raw materials business was adjusted. In terms of cosmetics, 24H1's cosmetics sector achieved revenue of 1.186 billion yuan (+7.24% year over year), of which Yilian earned 0.447 billion yuan (+14.17% year over year), around the main line of “China High Moisturizing”, innovated cultural joint brand development while focusing on second-tier explosive products; Dr. Aier's brand earned 0.645 billion yuan (+7.82% year over year) to further improve the product line, comprehensively upgrading the two major product lines of the Flash Charge series and the probiotic series; the Kemi brand entered medical and aesthetic hospitals and arranged Douyin and Aesthetic hospitals. Many new products have been launched through online channels such as Xiaohongshu. In terms of pharmaceuticals, 24H1's pharmaceutical sector achieved revenue of 0.24 billion yuan (-17.28% year over year), mainly due to high base and business adjustments during the previous period; in terms of raw materials and derivatives, the company actively adjusted sales strategies and product structure to expand pharmaceutical-grade hyaluronic acid products, and the 24H1 raw materials, derivatives and additives sector achieved revenue of 0.172 billion yuan (+0.72% year over year).

After the divestment of the real estate business, gross margin increased dramatically, and sales expenses increased year-on-year. 2024H1's gross margin was +7.70 pct to 51.87% year on year. The sharp increase in gross margin was mainly due to the same period last year, including the low gross profit real estate business before divestment; net margin was -1.37 pct to 8.11% year over year. In terms of expenses, the 2024H1 company's sales/management/ R&D/ finance ratio was 36.36%/4.10%/3.41%/-0.45%, respectively, +7.30/ -0.30/+0.79/-3.01 pcts, respectively.

Profit forecast and investment suggestions: The company focuses on the big health industry, and the cosmetics business brand strategy has been upgraded to “5+N”. The revenue of the main brands Yilian and Dr. Aier has maintained steady growth, and the new brand Kemi has entered the collagen medical and aesthetic circuit; the raw materials business adjusts sales strategies and actively explores overseas markets and applications in various fields, and is expected to continue to resume steady growth in the future; the pharmaceutical business is expected to return to an upward channel with the opening of online product links and the end of future business adjustments. We lowered our profit forecast based on the company's latest operating data. We expect the company's 2024-2026 EPS to be 0.31/0.35/0.42 yuan/share (the 2024-2026 EPS will be 0.34/0.42/0.52 yuan/share, respectively), and the PE corresponding to the stock price on August 23, 2024 will be 20/17/15 times, respectively, maintaining the “increase” rating.

Risk factors: Risk that macroeconomic recovery falls short of expectations, risk of industry competition intensifying risk, risk of channel expansion falling short of expectations, risk of brand category expansion falling short of expectations.