1H21 performance is in line with our expectations
The company announced 1H21 results: operating income of HK$114.49 billion, up 28.1% year on year; net profit of HK$2.44 billion, corresponding to earnings of HK$0.39 per share, down 5.4% year on year, in line with our expectations.
Development trends
The distribution business under the RMB scale increased 17.1% year over year, and the online business grew steadily. In the first half of 2021, the gross margin of the distribution business was 6.2%, down 1.7 percentage points from the previous year. The main reason was the decline in revenue from the export business of epidemic prevention materials with a high gross profit level due to the easing of the epidemic. Operating profit margin fell 1.5 percentage points year over year to 4.0%. Online transactions amounted to RMB 13.8 billion, an increase of 24% over the previous year. Revenue from the equipment distribution business was RMB 10.3 billion, a year-on-year increase of nearly 62% after excluding the export factor of epidemic prevention materials o pharmaceutical business revenue in the first half of the year increased 24.5% year on year (RMB scale), mainly due to the mitigation of the epidemic and the outstanding results of the company's digital transformation strategy. In the first half of 2021, prescription drug revenue increased 13.8% year on year (RMB scale), and revenue from self-diagnosis business increased 41.2% year on year (RMB scale). The gross margin of the pharmaceutical business was 59.3%, down 2.0 percentage points from the previous year, and the operating profit margin was 27.9%, up 0.5 percentage points from the previous year. The company continuously optimizes its product structure and actively promotes digital intelligence to continuously increase its market share.
R&D expenditure was approximately HK$750 million, an increase of 21.9% over the previous year. In the first half of 2021, the company's 2 products passed the consistency evaluation. The biopharmaceutical sector, Ruitongli's new indications for acute stroke and acute pulmonary embolism is in clinical phase II, and the application for clinical research to expand the new indications of deep vein thrombosis has been approved by the National Drug Administration.
Profit forecasting and valuation
We keep our net profit forecasts of HK$0.59 (YoY +12.1%) and HK$0.66 (YoY +12.0%) unchanged for 2021 and 2022. The current stock price corresponds to a price-earnings ratio of 6.8 times/6.1 times 2021/2022. We continue to outperform industry ratings, but considering the recent downward shift in the sector valuation center, we lowered our target price by 13.0% to HK$5.42, corresponding to 9.2 percent price-earnings ratio in 2021 and 8.2 percent price-earnings ratio in 2022. There is room for 35.2% upward from the current stock price.
risks
Pressure on centralized drug procurement; growth in pharmaceutical retail and medical device distribution businesses fell short of expectations.