LH21's performance is in line with our expectations.
The company announced 1H21 results: revenue of 8.149 billion yuan, an increase of 22.4% over the same period last year; net profit of 93 billion yuan, corresponding to earnings per share of 0.18 yuan, an increase of 27.0% over the same period last year, which is in line with our expectations.
Development trend
Sales of traditional Chinese medicine formula granules maintained steady growth. In the first half of 2021, the contribution income of traditional Chinese medicine formula granule business was 5.321 billion yuan, accounting for 65.3% of the total income, an increase of 16.4% over the same period last year. The reasons for the steady growth of revenue in this sector are as follows: 1) the company has increased the academic promotion of traditional Chinese medicine formula granules, and hospitals at all levels have continued to promote the operation mode of dispensing machines. The current stock of customers brought turnover growth of about 12.2% 6) the rapid growth in the number of grass-roots medical institutions, and the turnover growth of about 4.2% 6 brought about by new customers in this period. The gross profit margin was 70.6%, up 1.9% from the same period last year, mainly due to the scale and intensification of production and the implementation of lean management by the company, which further reduced the unit production cost.
The sales of proprietary Chinese medicine increased significantly. In the first half of 2021, the revenue of this sector was 1.75 billion yuan, up 34.6% from the same period last year, accounting for 21.5% of the total revenue. With the effective prevention and control of the epidemic, the outpatient clinics at all levels have been carried out step by step, and the key clinical standards and OTC standards have increased significantly. The gross profit margin was 60.5%, up 4.2 percentage points from the same period last year, mainly due to the obvious increase in sales of high-margin products, with a net profit margin of 8.8%, up 1.6 percentage points from the same period last year.
Sales of prepared pieces of traditional Chinese medicine increased by 24.8% year-on-year. The sector earned 708 million yuan in the first half of 2021, accounting for 8.7% of the total revenue. The gross profit margin was 17.1%, an increase of 2.1% over the same period last year, which was mainly affected by the increase in the proportion of sales of prepared slices with high gross margin. The net profit rate was 0.8%, an increase of 3.5% over the same period last year, and achieved a turnaround. This is mainly due to the increase in the business volume of the substitute frying center in Guangdong brought about by the investment in market development in the past two years, which makes the frying center break the break-even point.
Profit forecast and valuation
We maintain our 2021 and 2022 net profit per share forecast of 0.35 yuan (YoY7.3%) 0.41 yuan (YoY15.1%) unchanged. The current share price corresponds to 91 times 2021 / 2022 / 79 times earnings. We maintain an outperform industry rating and a target price of HK $505, corresponding to 12.2 times 2021 P / E and 10.6 x 2022 P / E, which is 34.3% higher than the current share price.
Risk
The liberalization of the formula granule market intensifies competition; active expansion brings depreciation and amortization pressure.