Description of the event
The company released its 2022 mid-year report, achieving operating income of 525 million yuan, an increase of 15.53% over the previous year; the net profit of the mother was 57 million yuan, an increase of 22.65% over the previous year; and achieved EPS of 0.35 yuan, and converted capital reserve of 10 to 4.
Incident reviews
Growth remained steady in the second quarter affected by the pandemic, and brand plans are beginning to bear fruit. The company achieved revenue of 275 million yuan in the second quarter, an increase of 15.02% over the previous year, and the net profit of the mother was 27 million yuan, an increase of 23.74% over the previous year. Net profit of non-return mothers was 26 million yuan, an increase of 18.51% over the previous year. Affected by the epidemic from April to May in the second quarter, the company's performance growth rate narrowed somewhat. In June, the “Heyan” brand promotion plan was launched, pilots were carried out in four provinces, and the “Heyan” series brand building and product promotion were carried out in a systematic manner, which strongly led to the return of performance in the second quarter. In the future, the “Heyan” brand promotion plan is expected to be extended to the whole country, driving the company's performance to continue to grow.
As channels expand, the share of OTC sales continues to increase. Currently, the company's prescription drug products cover more than 11,500 hospitals above the county (district) level, including more than 1,400 tertiary hospitals, and the number continues to increase. OTC products cover more than 85,000 stores in more than 800 pharmacy chains, and have established long-term stable business relationships with nearly 500 pharmaceutical chain headquarters. The company also increased investment in online sales on the Internet to achieve the OTC series “OMO Online+Offline Integrated” marketing model. Currently, OTC sales account for more than 30%, and it is expected to reach 35% by the end of the year, driven by brand plans. The company plans to increase the share of OTC sales to around 50% while maintaining overall sales growth.
The dominant variety has entered a secondary growth inflection point, and the smaller varieties have provided new performance growth points. The company's main products include varieties such as Kuntai capsules (for gynecological use), bitter ginseng gel (for gynecological use), niobitai capsules (for urinary system use), and summer hay grass oral solution (antipyretic). Revenue from 2022H1 gynaecological products was 3.7 billion yuan, an increase of 14.4% over the previous year, with a gross profit margin of 78.03%. Revenue from urinary system products was 109 million yuan, an increase of 15.5% over the previous year, with a gross profit margin of 85.86%. The revenue from the antipyretic and detoxification category was 38 million yuan, an increase of 19.1% over the previous year.
In addition, among the products currently produced by the company on a small scale, there are exclusive varieties such as Meditation Blood Revitalizing Capsules, Xinlikang Capsules, Longzhangkou Liquid, Angelica Lixian Oral Liquid, and Anti-Stasis Fat Reduction Capsules. The company plans to launch promotional activities to cultivate new performance growth points based on market conditions and production capacity arrangements.
Follow up on R&D, and reserve momentum for the future with new products. In accordance with the R&D requirements of “production generation, reserve generation, development generation”, the company continues to develop and reserve products such as new traditional Chinese medicines, traditional Chinese medicine formula granules, and classic famous recipes. The company owns three new traditional Chinese medicine products, Longcen Pelvic Soothing Granules, Kugor Jieyin Gel, and Shuyuitong Granules, and has completed phase III clinical trials. Production will begin one after another by the end of this year, and is expected to gradually contribute to sales in the fourth quarter of next year. The company also has 445 provincial standard varieties of traditional Chinese medicine formula granules and has completed 133 national standard filings. Research and development of classic famous formula products has also begun to bear fruit. A “234” pattern has been formed in research and development: the R&D offices are located in Shanghai and Guiyang, and the three R&D bases of Shanghai Haitian Pharmaceutical, Shanghai Shuofang Pharmaceutical, and Guiyang Xintian Pharmaceutical have been established, and four major R&D modules have been systematically built, including the R&D Center for Innovative Traditional Chinese Medicine, the R&D Center for Traditional Chinese Medicine Formulation Granules, the R&D Center for Ancient Classic Prescriptions, and the Post-marketing Clinical Medicine Research Center.
Investment advice
We believe that tremendous changes are taking place in the traditional Chinese medicine industry. The introduction of new classification and registration and application management measures for traditional Chinese medicine has solved the problem of how to develop innovative traditional Chinese medicine medicines, and innovative traditional Chinese medicine medicines are gradually getting closer. The company insists on research on innovative traditional Chinese medicines. Products that have been marketed and products that are about to be marketed, if research and development is carried out now, according to the new classification standards, they are all Class 1 new traditional Chinese medicine drugs. In terms of sales, the company expanded OTC channels, controlled costs and increased efficiency, increased brand investment. At the same time, it launched sales promotion of second-tier varieties. The development of new varieties will be put into production this year. It has formed a product pattern of “innovative traditional Chinese medicine+traditional Chinese medicine formula granules under development+investment in innovative small-molecule chemical drugs”. If the epidemic stabilizes in the second half of the year, we think the company's equity incentive goals for this year are still expected to be achieved. The company's 2022-2024 EPS is expected to be 0.79\ 1.04\ 1.36 respectively. Based on the closing price of 15.76 yuan on August 29, PE is 20\ 15\ 12 times respectively, giving it a “buy-B” rating.
Risk warning
Industry policy risks: medical insurance fee control, traditional Chinese medicine collection and price reduction, etc.; risk that product development and marketing progress is slower than expected; drug quality risk; price increase of Chinese herbal medicines; risk of the epidemic affecting the company's production and sales, etc.