Core views

The company achieved steady operating performance in the Q3 single quarter despite continuous optimization of the business structure, pressure from the external environment, and last year's high base, and the results were in line with expectations. The Kunyao Blood Saitong series continues to raise public awareness through the “777” brand strategy. The multi-dimensional transformation of the Kunming Traditional Chinese Medicine Boutique Sinopharm series brand helps the core products achieve steady growth. The company focuses on chronic disease management and aging health, and is actively promoting R&D progress. Looking forward to the future, 1) Kun's traditional Chinese medicine brand building, core products will continue to gain strength; 2) collaboration between the 37 industrial chain and Torch can be expected; 3) the results of channel reform are expected to be reflected in 25 years. Considering this year's cost investment and continued integration, we expect the company's operations to show a trend of low and gradual improvement in 24 years.

occurrences

The company released its report for the third quarter of 2024

On October 25, the company released the 2024 third quarter report. In Q1-3, the company achieved revenue of 5.457 billion, -2.73%; net profit to mother 0.387 billion, +0.36% year over year; net profit after deducting non-return to mother 0.289 billion, or -6.81% YoY.

24Q3 achieved revenue of 1.903 billion yuan in a single quarter, +3.41% year over year; net profit to mother 0.158 billion, -2.91% year over year; net profit after deducting non-return to mother 0.129 billion, -2.90% year over year.

Brief review

Performance was in line with expectations, and core products achieved steady growth

The company achieved revenue of 5.457 billion in Q1-3 in '24, -2.73%; net profit to mother 0.387 billion, +0.36% year over year; net profit after deducting non-return to mother 0.289 billion, -6.81% YoY. It is expected that the industrial sector will be under pressure in the short term due to the influence of the industry's external environment, and the commercial sector will gradually recover under a low base. 24Q3 achieved revenue of 1.903 billion yuan in a single quarter, +3.41% year over year; net profit to mother 0.158 billion, -2.91% year over year; net profit after deducting non-return to mother 0.129 billion, -2.90% year over year. Q3 achieved steady operating performance in a single quarter despite continuous optimization of the business structure, pressure from the external environment, and last year's high base, and the results were in line with expectations.

Core products achieved steady growth. Looking at segments and product lines: 1) Kunyao Hesketong series: The company officially launched the “777” brand for the product group with 37 as the core ingredient. 24Q3 joined hands with various Dalian chains to continue to carry out a number of 777 37 “River of Life” private events and the “777 Silver Haired Youth Protection Campaign” nationwide to establish the public's full understanding of the effects of 37 saponins, the active ingredient in Hesetong softgels. We believe that the company's “777” brand strategy will help give full play to the combined advantages of multiple dosage forms and multiple product specifications in the Hesketong oral series, expand collaboration through strengthened channels, enhance product brand value, and drive products to achieve rapid growth outside the hospital.

2) Kunming Traditional Chinese Medicine Premium Chinese Medicine Series: Multi-dimensional brand building. The company focuses on the “Kunming Traditional Chinese Medicine 1381” corporate brand, focusing on core products such as Kun Traditional Chinese Medicine Shenling, Spleen and Stomach Relieving Granules, and insists on a three-wheel drive with “brand culture+category expansion+IP marketing”. 24Q3 In terms of (1) brand culture, in August 24, the company released the brand culture promotional video “Enquiry 1381” to establish a rich historical background and grand brand pattern for Kunming Traditional Chinese Medicine 1381; (2) In terms of category expansion, classic products such as Shenling Spleen and Stomach Health Granules were expanded from the traditional spleen supplement circuit to a wider digestive circuit to consolidate and expand market share; (3) In terms of IP marketing, it teamed up with “Health Weekly” to launch the “Spleen and Stomach Care Guide” series of activities to deepen the participation of Chinese medicine consumers in Kunming The recognition of Ling's spleen and stomach health products to achieve brand influence Continually improving. 24Q3 We expect these multi-dimensional brand building actions to help our core products achieve steady growth.

Focusing on chronic disease management and geriatric health, R&D progress is being actively promoted. The company's 24Q3 main research and development progress includes: (1) Colchicine tablets from Xishuangbanna Pharmaceutical, a wholly-owned subsidiary, received the “Drug Supplement Application Approval Notice” issued by NMPA; Banna Pharmaceutical became the first domestic company to pass the consistent evaluation of generic drug quality and efficacy, consolidating the product pipeline in the musculoskeletal field; (2) the company's self-developed new traditional Chinese medicine/natural drug for ischemic stroke KYAZ01-2011-020, a new class 1 drug suitable for ischemic stroke, in statistical analysis of phase II clinical study data; (3) improved chemical drug type 2.2 New drugs KYAH02-2020-149 has entered the clinical study preparation phase, and two Class 3 generic drugs are continuing to advance BE trials. In terms of R&D, the company focuses on the fields of chronic disease management and geriatric health. Guided by clinical value, it continuously increases investment in R&D, enriches the product pipeline, and actively lays out the silver hair health industry. The gradual implementation of R&D progress will provide a new engine for the company's long-term development.

Profitability remains stable, and quality and efficiency improvements continue to advance. 2024Q1-3's gross margin was 40.91%, -4.15 pp; net profit margin was 7.16%, +0.1 pct year over year; gross margin was mainly affected by changes in revenue structure, but profitability remained stable. The 2024Q1-3 sales expense ratio is 25.99%, or 5.06 pp, which is expected to be mainly due to the reduction in the company's marketing expenses and changes in the combined revenue structure; the management expense ratio is 4.2%, +0.03 pp; the R&D expenses rate is 1.1%, +0.33 pp; and the financial expenses ratio is 0.31%, +0.14 pct year over year. The overall cost side was well controlled, R&D investment intensity was maintained, and the project progressed smoothly. Net cash flow from operating activities was 0.216 billion yuan, compared to -0.036 billion yuan in the same period last year. Operating cash flow optimization was obvious. Overall, the company's work to improve quality and efficiency continues to advance. The rest of the financial indicators are generally normal.

Future outlook: 1) Kun Traditional Chinese Medicine brand building, core products continue to gain strength: The company builds the “Kunming Traditional Chinese Medicine 1381” corporate brand through a three-wheel drive of “brand culture+category development+IP marketing”. Judging from the 24H1 situation, the three core products of Shenling Spleen and Stomach Granules, Liver Relief Granules, and Fragrant Sand Stomach Tablets increased by more than 20% over the same period last year. We expect to maintain steady growth throughout the year. In the future, the combination of creating major core products and digging deeper into classic traditional Chinese medicine recipes from Qiankun will contribute to continued growth. 2) Collaboration between the 37 industry chain and Torch can be expected: The company has a complete industrial chain in the 37 business. It is expected that the subsequent completion of the transaction with China Resources Torch will lead to increased marketing synergy and improved competitive environment. Through differentiated market positioning, the two products are expected to expand and strengthen 37 oral formulations. 3) The results of the channel reform are expected to be reflected in 25 years: the company used 39 Commercial Road as a model to build the Kunming Pharmaceutical Commercial Road, and integrated retail and medical system sales channels throughout the country in 24 years, so that the channel partners of Kunyao Commercial Road changed from a short-term mindset to a long-term concept, and at the same time promoted the realization of omni-channel digital operation. We expect the results of channel reform and other efforts to be reflected in business performance starting in 2025.

Considering this year's cost investment and continued integration, we expect the company's operations to show a trend of low and gradual improvement in 24 years.

Profit forecasting and investment ratings

We forecast that in 2024-2026, the company's revenue will be 79.3, 8.728 billion yuan, and 9.684 billion yuan, respectively, up 2.9%, 10.1%, and 11% year-on-year, respectively; net profit to mother will be 5.1, 6.27, and 754 million yuan, respectively, up 14.8%, 22.9%, and 20.2% year-on-year, respectively. Equivalent EPS is 0.67 yuan/share, 0.83 yuan/share, and 1 yuan/share, respectively. The corresponding PE is 22.9X, 18.7X, and 15.5X, maintaining a “buy” rating.

Risk analysis

1. The company's reform falls short of expectations. The company is actively promoting the reform work, but there may be situations where the results of the reform fall short of expectations, which in turn affects the company's profit expectations; 2. Risk of drug price reduction: the competitive market for the company's core products and other products may increase, which in turn affects the company's profit expectations; 3. Risk of fluctuations in raw material prices: the price of Chinese herbal medicines will be affected by various factors such as the macro environment, natural disasters, planting conditions, etc., and is prone to large fluctuations. If the price of traditional Chinese medicine raw materials rises, the company's production costs may rise sharply, which in turn affects the company's production costs Profit; 4. Product promotion falls short of expectations: The company's investment in sales increases. If product promotion falls short of expectations, it will affect sales revenue and thus the company's profit.