1H22 performance is in line with our expectations
Chinese traditional medicine announced its results for the first half of 2022: revenue was 5.91 billion yuan, down 27.5% from the same period last year; net profit from home was 410 million yuan, corresponding to 0.08 yuan per share, down 55.5% from the same period last year, which is in line with our expectations.
Trend of development
The income of traditional Chinese medicine formula granules declined. In the first half of 2022, the contribution income of traditional Chinese medicine formula granules business was 2.762 billion yuan, down 49.1% from the same period last year, mainly due to the lack of national and provincial standards for traditional Chinese medicine formula granules and the lack of varieties for filing, and the terminal group was limited. The gross profit margin was 61.6%, down 9.9 percentage points from the same period last year. We believe that with the gradual improvement of the national standard system of formula granules and the opening of the grass-roots medical market, the market scale of traditional Chinese medicine formula granules will continue to expand, and the company's business is expected to recover gradually.
Sales of proprietary Chinese medicine have picked up. In the first half of 2022, the sector's revenue was 1.766 billion yuan, up 7.1% from the same period last year, with sales of Runzao Zhiyang capsules and Yupingfeng granules up 20%. The gross profit margin was 58.2%, down 1.2 percentage points from the same period last year. We expect that the company will adhere to the strategy of building a large variety and promote the sales of key clinical products.
The gross profit margin of traditional Chinese medicine slices increased. The sector's revenue in the first half of 2022 was 841 million yuan, an increase of 22.1% over the same period last year. The gross profit margin was 19.0%, an increase of 3.6% over the same period last year, mainly due to the further optimization of the product structure and the internal coordination of traditional Chinese medicine and prepared slices of traditional Chinese medicine.
Profit forecast and valuation
Considering the different filing progress of formula granules in different provinces, we lowered the net profit of 2022Universe by 23.4% to 1.574 billion yuan / 2.024 billion yuan in 2023,-18.6% / + 28.6% compared with the same period last year. The current share price corresponds to a price-to-earnings ratio of 8.8 times 2023 / 6.9 times 2023. We maintain an outperform industry rating, but as a result of lower earnings forecasts, we cut our target price by 20.1% to HK $4.68, corresponding to 12.9 times 2022 price-to-earnings ratio and 10.0 times 2023 price-to-earnings ratio, which is 45.8% upside from the current share price.
Risk
The liberalization of the formula granule market intensifies competition; active expansion brings depreciation and amortization pressure.