In recent days, various stimulus policies designed from the top have been launched, giving the long-dull stock market a long-lost vitality. On September 30, the Shanghai Composite Index closed up 8.06%, standing above 3,300 points, with a cumulative increase of more than 17% in September; the Shenzhen Component Index closed up 10.67%, with a cumulative increase of more than 26% in September; the ChiNext Index closed up 15.36%, with a cumulative increase of more than 37% in September; all set a record for the largest single-day increase in history. On that day, the turnover of the two markets was 2.593 trillion yuan, setting a record high since 2006. The activity of funds has risen unprecedentedly, and once exceeded the carrying capacity of the exchange server during the session. Players in the market are gearing up to "do a big job". However, the pharmaceutical industry has been subject to many restrictions due to its strong rigid demand and its concern for people's livelihood, so it has been considered a "defensive sector" for a long time. However, there are still some offensive sub-tracks in this industry to carry the anxiety of the overall environment being good and the funds preferring medicine.

The traditional Chinese medicine health care sector, which has both consumption and dividend attributes, is one direction. They have rigid medical demand, and at the same time, their consumption attributes make the channels more diversified, and they are less negatively affected by policies. A large part of them are currently under the group system of large central state-owned enterprises. After the three-year reform of state-owned enterprises, they are ushering in a leap-forward improvement in efficiency; at the same time, the trend of state-owned enterprises becoming bigger and stronger in the past two years has turned back to drive these companies within the group to work closely with each other and develop in a higher direction. Most of them have stable "cash cows", and these foundations allow them to join the high-dividend queue, which is a scarcity under the new narrative system of returning shareholders in the current capital market. With steady progress and new stories, they are the new force driving growth in the health industry. And Dong'e Ejiao is one of the most typical representatives.

In the just-concluded H1 of 2024, Dong-E-E-Jiao has just handed in a brilliant report card: operating income of 2.748 billion yuan, a year-on-year increase of 26.80%; net profit of 738 million yuan, a year-on-year increase of 39.03%. You know, this is still a result under the high base of 72% growth in net profit in the first half of last year. Against the background of the current slowdown in the overall macroeconomic growth of medicine, this is obviously a valuable result. Behind this is that Dong-E-E-Jiao has completely walked out of the shadow of high inventory before. Previously, under the background of consumption upgrading, the company's "return to the value of donkey-hide gelatin" strategy has driven the increase in the quantity and price of core products for a long time. Since 2010, the core product donkey-hide gelatin has been raised 13 times. For high-end tonic products, moderate price increases are an important driver of performance improvement, which is also a common way for high-end products worldwide. However, this model faced challenges around 2018 due to stockpiling problems, and the company's inventory backlog reached a historical high.

To this end, the company has reshaped the donkey-hide gelatin market ecology through a series of measures such as stabilizing prices, clearing channels, and strengthening confidence. Since then, it has also started a three-year long road to performance recovery for Dong'e Ejiao. Until the first half of 2024, the company's gross profit margin of 73.54% is infinitely close to the historical high (73.65% in 2012), and the net profit margin has reached 26.88%, also returning to the historical high level. At the same time, the impressive data on revenue and profit also fully prove the effectiveness of these measures. In terms of channel inventory, Dong'e Ejiao disclosed in the investor relations activity record sheet in early August this year that the inventory cycle of donkey-hide gelatin blocks is within 3 months, the inventory cycle of compound donkey-hide gelatin paste is within 80 days, and the inventory cycle of donkey-hide gelatin cake is about 10 days. The continued growth momentum in the first half of this year has further confirmed the new life that Dong'e Ejiao can bring as the leader of domestic tonics.

As a light luxury tonic, the consumption attributes of donkey-hide gelatin determine that there can be many new ways to play with its brand. At present, the company is also actively strengthening the top brand building of "National Treasure Dong'e Ejiao", and focusing on online and offline channels to increase brand penetration. Limited by the supply problems brought about by the growth cycle of raw materials, Ejiao is a product with relatively high entry barriers, and Dong'e Ejiao's historical accumulation in this category has built a brand moat for it. This means that the company can devote more energy and resources to further improve the penetration rate, rather than endlessly getting involved in homogeneous competition.
This is the core reason why the company's business can be sustained and stable. But stability is not the goal. Under the background of Healthy China, the company, as a leading player rooted in the health field for many years, naturally has more stories to tell.

On the basis of the "tonic" of Ejiao, the company further explores the properties of drugs and conducts systematic research on the material basis and mechanism of action of Ejiao, aiming to find new increments in a relatively serious market with more rigid demand. At present, based on the product attributes of Compound Ejiao, the company actively responds to the national support policy for the supply side of innovative Chinese medicine, and has invested in clinical development of indications including cancer-related fatigue and qi and blood supplementation. The research results of the former won the "Special Excellence Award" at the ASCO Annual Meeting, one of the world's highest academic forums this year, and won high recognition in the international academic field. These are important drivers for the growth of the core product in the hospital market. From the in-hospital end, Compound Ejiao is based on the relaxation of medical insurance payment policies and actively develops the in-hospital market; the retail end fills the gap in the terminal market through precision marketing.

On the other hand, from the perspective of the pharmacy channel, as a model of basic community medicine + high-profit varieties driving performance, the constraints on high-gross-profit categories of chain pharmacies brought about by the strong voice of medical insurance have limited the profit varieties that the latter can choose.
As a high-end health product, Ejiao will naturally become more and more its new choice, which will invisibly provide the company with a large number of new pure distributors and provide Dong'e Ejiao with a steady stream of new growth from the channel. Of course, the company's efforts in its own areas of expertise are also continuing. Last June, Dong'e Ejiao held a brand launch conference of "Royal Paddock 1619" in Shenzhen. This is a collection of products including velvet antlers and deer blood, which is currently one of the company's key market mindset building directions. The Royal Paddock is a concept taken from the royal family of the Qing Dynasty. In 1619, Nurhachi fenced off a large area of sparsely populated forest areas in Changbai Mountain and its vicinity for hunting by royal family members. Later, it was the hunting place during the reigns of Kangxi and Qianlong. Dong'e Ejiao chose such an image of "rich in male hormones" to focus on the high-end men's health and health products market. According to Frost & Sullivan's forecast, the size of China's men's health and health market is expected to reach RMB 99.6 billion by 2025.

Nowadays, the mainstream products in this field include "kidney yin deficiency" and "warming and nourishing kidney yang". The former includes Liuwei Dihuang Pills represented by Zhongjing, Tongrentang, Jiuzhitang, etc., while the latter mainly includes Huiren Shenbao, Bushen Yishou Capsules, etc., but there is still a lack of phenomenal varieties. Dong'e Ejiao intends to use the company's existing brand building capabilities to recreate a "Dong'e Ejiao" in the field of men's health care. The product has not arrived, but the market has come first. Recently, Dong'e Ejiao has cooperated with Tencent Sports, local popular tourist attractions and other online and offline channels for large-scale exposure. On the basis of stable growth, the company has more room to explore some new directions. At present, the company's monetary funds + trading financial assets have reached 8.027 billion, and the cash flow in the first half of this year was 2.736 billion, which greatly exceeded the net profit, which provided the company with absolutely sufficient ammunition for the layout of new fields. For a "high-end consumer goods" enterprise, the increase brought by a "phenomenal" new product is immeasurable.

The high-profile appearance of "Royal Paddock 1619" is inseparable from the support of China Resources. With the joining of the new team, Dong'e Ejiao can implement more and more plans. In fact, the year when Dong'e Ejiao's channel inventory problems led to performance losses was also the year when China Resources began to fully participate in the company's operations. Since then, the three years of solving legacy problems such as inventory have also been three years of running-in for the new business team. Judging from the results now, this process is undoubtedly smooth. Last year, Bai Xiaosong, a veteran of the China Resources system, took over as chairman of Dong'e Ejiao, and together with Cheng Jie, the president who arrived earlier, he took charge of this national trend brand. Both of them have served in China Resources Sanjiu for many years, especially the latter, who is experienced in OTC marketing and young and vigorous. Since 2022, the new leadership team has injected new vitality into Dong'e Ejiao. On the one hand, by reshaping the brand of donkey-hide gelatin products, the focus of production and sales is concentrated on donkey-hide gelatin products, and the donkey-hide gelatin category is brought back to the high-speed growth track, with the revenue share increased to more than 90%; on the other hand, empowering brand renewal, shifting from hoarding to focusing more on pure sales, accelerating endogenous growth; furthermore, the organization has greatly streamlined talent allocation, with the overall turnover rate of management exceeding 60%. Through performance appraisal and salary reform, organizational vitality has been stimulated, greatly improving per capita output.

Today, Sanjiu's experience in several successful OTC categories is being gradually transferred to Dong'e Ejiao, helping it to improve operating efficiency, thereby increasing revenue and profit growth, while also promoting Dong'e Ejiao's transformation from the previous "health products" to the current "drugs + health consumer products" dual positioning, greatly strengthening its brand position. In addition to China Resources Sanjiu, many resources under the entire China Resources system can continuously empower subordinate units like Sanjiu.

After the three-year state-owned enterprise reform came to an end, further strengthening the scale and market position of central state-owned enterprises has become a new KPI. The entire China Resources Group still needs to continue to expand and become bigger and stronger, and this goal is inseparable from the further development of its subsidiaries. How to use the synergy of various units to achieve the effect of 1+1>2 in the future is also one of the opportunities of the times that Dong'e Ejiao can seize. In addition, restructuring and mergers and acquisitions have been put on the agenda recently. China Resources is constantly acquiring. Dong'e Ejiao, which has a large amount of cash flow, a stable business base, and is constantly expanding its product categories, can naturally be one of the leading parties in external mergers and acquisitions. "Borrowing a stove to burn fire" is the only way for most large-scale enterprises to become bigger and stronger. From the current historical node, Dong'e Ejiao will be one of the companies that fired the first shot of domestic pharmaceutical mergers and acquisitions.

In such a situation of "stable endogenous growth + expected external expansion", Dong'e Ejiao has maintained an excellent cash debt level in recent years. As a result, a large amount of cash and cash equivalents once dragged down the ROE level, which is determined by the relatively low cost investment of traditional Chinese medicine health products. Based on this, in order to continuously improve the level of capital market feedback, the company announced the latest dividend plan in the first half of this year. For the first time in history, Dong-E-E-Jiao started dividends in the mid-term, paying 11.44 yuan (tax included) per ten shares to all shareholders, with a total cash distribution of 737 million yuan, which is about 100% of the net profit in the first half of the year. It is one of the only eight companies in the market that have announced a mid-term dividend plan with a dividend of more than 100 yuan per hand. If the dividends of the previous fiscal year disclosed at the beginning of the year are added, the dividend amount this year has reached 1.883 billion yuan, and the dividend rate exceeds 6%. Although the company has paid dividends every year for the past 25 years, with a total amount of 7.732 billion, this year is undoubtedly the year when Dong-E-E-Jiao has pressed the accelerator in returning shareholders.

In the past two years, judging from the news released by the top-level design, whether it is guiding listed companies to increase dividends and repurchases, improve the level and frequency of dividends, or proposing to include companies that have not paid dividends for many years or have a low dividend ratio into the "implementation of other risk warnings" policy spirit, it means that the country aims to build a capital market with high returns for investors from top to bottom. Increasing dividends is an obligation that listed companies should fulfill to investors, and it is also a responsibility. It reflects the company's operating ability, and at the same time a reasonable dividend policy can also attract more investors to invest in this company. And the top-level design will not disappoint those companies that respond to the call. Dong'e Ejiao once stated that it will be committed to becoming the most trusted nourishing and health leader of the public to shoulder the mission of inheriting and innovating the culture of traditional Chinese medicine. Such a "strategic positioning", building a "two-wheel drive" business growth model of medicine + health consumer products, focusing on the "three-industry integration" of breeding demonstration, brand development and cultural leadership, and focusing on improving the company's "eight key capabilities" such as industrial chain construction, brand building, omni-channel marketing, R&D innovation, capital operation, intelligent transformation, agile supply and organizational guarantee. Based on the above "1238" development strategy, it can be foreseen that Dong'e Ejiao will go further and further on the road of brand building, user empowerment, excellent cultural inheritance and shareholder returns in the future.

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