China Resources joined the organization for student transformation and business structure reshaping and optimization. After KPC changed its controlling shareholder to China Resources 39 in 2022, the company underwent profound changes in 2023-2024, and has now smoothly passed the integration stage. 1) Personnel changes completed:

Yan Wei, chief marketing officer of China Resources 39 and general manager of the OTC division, served as vice chairman, party committee secretary, and president; 2) Channel transformation progressed smoothly: the company's 1381 and 777 divisions and products were successfully integrated into the 399 commercial channel, and the integration of channel vendors in most provinces and regions in China was completed, and the construction of the Kunming Pharmaceutical Business Road was accelerated from 2024; 3) Marketing organization reform: the three major divisions of “Kunming Traditional Chinese Medicine 1381, KPC1951, 777” were formed, establishing “Yinfa Health Industry Leader, Premium Chinese Medicine Leader - Chronic Disease Management Leader “People” new strategic goals.

Revenue from 777+ Chinese medicine is expected to accelerate, the injection business will steadily pick up, and the industrial sector will accelerate to catch up with the 5-year plan target. 1) 777: In December 2024, the company completed the acquisition of 51% of China Resources Torch's shares, and the country's only two blood soft approvals were merged into one (the total sales scale of the two is about 1.5 billion yuan in 2023). With the synergy between channels and terminals, it is expected that the “1+1>2” effect will be achieved. We are optimistic that blood softener will move from treatment to prevention in the cardiovascular and cerebrovascular fields and become a major product in the field of chronic disease management. 2) Kunming Traditional Chinese Medicine: Focusing on the “big variety - big brand - big category” strategy, we used China Resources to build the Kunming Pharmaceutical Commercial Road and expand the core varieties of Shenling to strengthen the spleen and stomach, relieve the liver, and calm the stomach. In the future, “Kunming Traditional Chinese Medicine 1381” is expected to achieve brand value reshaping and create 2-3 billion-level single products with the continuous empowerment of 39. 3) Injections:

Due to the expiration of the medical insurance pilot and the impact of collection, the injection business was damaged in 2024. The negative disturbances have been fully cleared, and it is expected to usher in restorative growth. The company has formulated a 5-year strategic plan to achieve industrial revenue of 10 billion yuan by the end of 2028. Revenue growth will slow down in 2024 due to channel adjustments and the policy environment. We expect the company to catch up with the 5-year plan targets at an accelerated pace starting in 2025.

Reducing costs and increasing efficiency, and increasing net interest rates are expected to contribute to performance flexibility. After excluding the KPC business, the profit margin of the industrial sector of KPC in 2019-2023 was about 8%-11%, and the net non-net interest rate was about 5%-8%, which is far below the industry average. By division, the KPC1951 division mainly focuses on mature varieties such as freeze-dried blood clots. Considering the expansion of harvesting and squeezing out sales expenses, the net interest rate is expected to remain stable. Most varieties in the 777 Hekun Traditional Chinese Medicine Division are under cultivation, and there is still plenty of room for improvement in terms of production process costs and channel management capabilities. It is expected that net interest rates will continue to increase with the continuous implementation of the Kunming Pharmaceutical Commercial Road and the large-scale effects of large single products.

Profit forecast and investment rating: We expect the company's revenue in 2024-2026 to be 8.462, 9.216, 10.058 billion yuan, up 9.9%, 9.1% year on year, and net profit to mother 0.607, 0.72, and 0.861 billion yuan, up 36.4%, 18.7% year on year, and corresponding EPS of 0.80, 0.95, and 1.14. Considering that the company has successfully gone through the integration and adjustment period, after using China Resources to build the Kunming Pharmaceutical Commercial Road, the company's brand power and marketing power have been enhanced, and profitability is expected to continue to increase as integration deepens. Coverage for the first time, it was covered, and a “buy” rating was given.

Risk warning: Policy risks in the Chinese medicine industry, risk of product promotion falling short of expectations, risk of raw material price fluctuations, risk of information delays or untimely updates in public data used in research reports.