Pientzehuang, Pientzehuang Pharmaceutical's namesake core product, features scarcity, high barriers and high growth visibility. While the higher price of core raw materials weighed on the Company's gross profit margin (GPM) in 3Q23, the product price rises in May are likely to boost Company's annual revenue and profit. With the continuous improvement of product matrix and the further diversification of sales channels in the future, we believe that Pientzehuang product series is poised to keep fulfilling the logic of increase in both sales volume and selling price. We maintain our 2023E/24E/25E net profit forecast of Rmb2,991mn/3,493mn/4,200mn, corresponding to EPS of Rmb4.96/5.79/6.96. Based on the Company's average PE of 62x in the past ten years (with average net profit growth rate at 23%) and 77x in the past five years (with average net profit growth rate at 28%), we forecast the Company's 2023E net profit growth rate to be 21%, which is slightly lower than that in the past ten years. Therefore, we assign 60x 2023E PE, and reiterate the target price of Rmb298 and the "OVERWEIGHT" rating.

Revenue increased YoY in 3Q23, but GPM was weighed on in the short term.

In 1-3Q23, Pientzehuang Pharmaceutical achieved revenue/attributable net profit (ANP)/recurring ANP of Rmb7,600mn/2,405mn/2,441mn (+14.88%/+17.16%/+18.39% YoY), respectively. Its overall GPM grew by 0.81ppts YoY to 48.45%, but the GPM of its pharmaceutical manufacturing business declined by 3.11ppts YoY to 75.24%. Its selling/administrative/R&D expense ratios changed by -0.63ppts/+0.39ppts/+0.21ppts YoY to 4.98%/3.43%/2.37% respectively, leading overall expense ratio to stay basically flat YoY. In 3Q23 alone, the Company's revenue/ANP/recurring ANP came in at Rmb2,555mn/864mn/864mn (+16.48%/+17.03%/+15.89% YoY; +5.75%/+12.02%/+7.08% QoQ), respectively. Pientzehuang Pharmaceutical's overall 3Q23 earnings results are in line with our expectations. After the product price rises in May, the Company achieved revenue growth in 3Q23, but the rising price of core raw materials still weighed on its GPM.

Pharmaceutical business grew steadily, while cosmetics business gradually recovered.

In 1-3Q23, Pientzehuang Pharmaceutical achieved a revenue of Rmb3,059mn (+6.88% YoY) from pharmaceutical distribution business, with a GPM of 15.83% (+2.52ppts YoY); and Rmb3,852mn (+22.51% YoY) from pharmaceutical manufacturing business, with a GPM of 75.24% (-3.11ppts YoY). Its pharmaceutical business maintained a steady growth trend and continuously consolidated regional superiority. The Company's cosmetics business contributed a revenue of Rmb431mn (-6.53% YoY) and had a GPM of 63.15% (+1.47ppts YoY). Pientzehuang Cosmetics, a controlled subsidiary of the Company, owns many brands such as Pientzehuang and Queen. Its short-term earnings were weighed on by the slowdown in the expansion of Pientzehuang experience store network, but have gradually recovered. Going forward, the subsidiary will focus on making innovations in products,marketing and channels to promote brand development.

The higher-priced core product is poised to keep fulfilling the logic of increase in both sales volume and selling price.

On May 5, 2023, Pientzehuang Pharmaceutical announced that it would raise the retail price of Pientzehuang Tablets, the Company's key product, from Rmb590/tablet to Rmb760/tablet (by about 29%), and its wholesale price by about Rmb170 (with its ex-factory price to be raised by more than 29%) in the domestic market; its wholesale price in overseas markets would be correspondingly lifted by about US$35/tablet. In 1-3Q23, the Company's drug products for treating liver diseases (mainly Pientzehuang product series) contributed a revenue of Rmb3,562mn (+14.29% YoY). Pientzehuang's raw materials include natural musk (the secretion of musk glands of male forest musk deer), natural calculus bovis, snake gall and Notoginseng. The cultivation of forest musk deer is subject to strict examination and approval, and the use natural musk of in drugs is subject to state approval. Based on our estimate in our previous report "Pientzehuang (600436.SH) In-depth Report _ A national treasure medicine as a leading brand in the broad healthcare field" (Jul 28, 2020), we reckon that the Company's core raw material reserves are relatively sufficient. Driven by consumption upgrading and targeting high-net-worth individuals (HNWIs) with low price sensitivity, Pientzehuang product series is poised to keep fulfilling the logic of increase in both sales volume and selling price.

The fast-growing price of natural calculus bovis could help Angong Niuhuang Pills to become the second growth driver.

In 1-3Q23, the Company's revenue from drug products for treating cardiovascular and cerebrovascular diseases (mainly Pientzehuang Angong Niuhuang Pills) increased by 79.34% YoY to Rmb240mn. The sustained growth in the sales of Angong Niuhuang Pills was mainly thanks to the rapid rise in the price of the core raw material natural calculus bovis, which reached Rmb120,000/kg as of Oct 2023 (according to ZYCTD.com)-surging by 130.77% compared with Jan 2022. We believe that the rising price of natural calculus bovis and the Company's brand advantage will help Angong Niuhuang Pills become the second earnings driver.

Potential risks: Disappointing sales of the Company's core products; raw material prices continuing to rise beyond expectations; insufficient supply of raw materials; product quality problems; sales of cosmetics business missing expectations.

Earnings forecast, valuation and rating: Pientzehuang, Pientzehuang Pharmaceutical's core product, features scarcity, high barriers and high growth visibility. While the higher price of core raw materials weighed on the Company's GPM in 3Q23, the product price rises in May are likely to boost Company's annual revenue and profit. With the continuous improvement of product matrix and the further diversification of sales channels in the future, we believe that Pientzehuang product series is poised to keep fulfilling the logic of increase in both sales volume and selling price. We maintain our 2023E/24E/25E net profit forecast of Rmb2,991mn/3,493mn/4,200mn, corresponding to EPS of Rmb4.96/5.79/6.96. Based on the Company's average PE of 62x in the past ten years (with average net profit growth rate at 23%) and 77x in the past five years (with average net profit growth rate at 28%), we forecast the Company's 2023E net profit growth rate to be 21%, which is slightly lower than that in the past ten years. Therefore, we assign 60x 2023E PE to the Company, and reiterate the target price of Rmb298 and the "OVERWEIGHT" rating.