Revenue and net profit grew steadily in the first half of 2021
The company announced its results for the first half of 2021 on August 20. Operating revenue increased 22.4% year-on-year to 8.15 billion yuan (RMB, same below), and shareholders' net profit increased 27.0% year-on-year to about 93 billion yuan. Operating income fell slightly short of our expectations but maintained relatively rapid growth. Shareholders' net profit slightly exceeded expectations due to reasons such as higher gross margin, lower sales management fees, and reduced minority shareholders' equity. By business, revenue from traditional Chinese medicine formula increased 16.4% year on year to 5.32 billion yuan, revenue from proprietary Chinese medicine business increased 34.6% year on year to 1.76 billion yuan year on year, revenue from the Chinese medicine tablet business increased 24.8% year on year to about 710,000 yuan, and revenue from traditional Chinese medicine health business increased 48.9% year on year to about 62.82 million yuan. Revenue from traditional Chinese medicine formulations fell slightly short of expectations, but the growth rate of the proprietary Chinese medicine sector exceeded expectations. In the proprietary Chinese medicine sector, revenue from key products such as the osteoporosis drug Xianling Bou, neck relief pellets, dry and itchy capsules, and poultice pills grew more than 40% year-on-year. We believe the main reason was the demand for drugs for chronic diseases and the resumption of pharmacy operations and the company's sales and promotion after the epidemic was over. The OTC sector in the proprietary Chinese medicine sector also saw a rapid increase in sales revenue of products such as Feng Liuxing Pharmaceutical Liquor, Snake Bile Chuan Beisan, Angong Niuhuang pills, and lumbar and kidney cream, so the revenue of the proprietary Chinese medicine sector slightly exceeded expectations. In terms of profit margin, the gross margin of traditional Chinese medicine formulations remained stable, and the gross margin increased by 1% to 61.4% due to an increase in the proprietary Chinese medicine sector. The company's management and control of sales management expenses rates was relatively successful, and minority shareholders' rights were also reduced, resulting in shareholders' net profit growing faster than revenue.
It is expected that the main business will maintain steady growth in the future
We expect the company's revenue to maintain steady growth in the next three years. Our main business, traditional Chinese medicine formula granules, and the 2020 23E revenue CAGR of revenue from the proprietary Chinese medicine business are 15.8% and 13.9% respectively. The main reasons include: 1) The company will continue to benefit from increased demand for traditional Chinese medicine formula granules: traditional Chinese medicine formula particles are safer and are more in line with traditional Chinese medicine's “dialectical theory, increase and decrease with evidence” theory, so we expect demand for traditional Chinese medicine formula granules to continue to grow steadily, and Chinese medicine will benefit as the leader. 2) The sales growth rate of the proprietary Chinese medicine sector will accelerate in the post-pandemic era:
In the first half of 2020, due to the impact of the domestic epidemic, some pharmacy operations and demand for drugs for chronic diseases were affected. Currently, these effects have been significantly reduced and the company's sales network is strong. It is expected that the sales growth rate in the proprietary Chinese medicine sector will accelerate.
The target price was adjusted to HK$4.35, and the rating was raised to “increase holdings”
We think that due to recent executive changes and other reasons, the operation may need a bit of a run-in period. Considering that revenue from traditional Chinese medicine formula granules, which accounted for about 65% of revenue in the first half of the year, was slightly lower than expected, we lowered the company's 2021-23E revenue forecasts by 1.9%, 3.5%, and 5.0%, respectively. Due to reasons such as the decline in minority shareholders' equity in the first half of the year, we raised our 2021 shareholders' net profit forecast by 5.4%, but 2022-23E shareholders' net profit was slightly lowered by 2.6% and 4.1%, respectively. Based on the adjusted earnings forecast, the estimated 2020-23E shareholder net profit CAGR is 15.8%. The target price was adjusted accordingly from HK$4.45 to HK$4.35, corresponding to 8.5 times 202E PER. Since the company's stock price has recently declined, the rating was raised from “neutral” to “increased holdings.”
Risk warning: COVID-19 has repeatedly affected operations; (2) competition in the Chinese medicine formula pellet sector may intensify