Big Infusion led 1Q23's performance growth, with a target price of 24.32 yuan to maintain the “increase in holdings”

On April 27, China Resources Shuanghe announced 1Q23 revenue of 2.74 billion yuan (+8.8% yoy), and net profit of the mother was 3.7 billion yuan (+12.2% yoy). Revenue and profit grew steadily on a high base. The main reasons were: 1) the increase in demand for fever clinics benefiting from major infusions and the recovery in inpatient care; 2) the steady recovery of specialty varieties, and some old varieties on the chronic disease platform were slightly dragged down. Looking ahead to 2023, considering that strong demand for large infusion 1Q lays the foundation for high growth during the year+stabilization of chronic diseases/specialty varieties and the rapid release of new bids collected, we are optimistic that the company will return to double-digit revenue growth in 2023. The profit growth rate will benefit from a continuous improvement in the cost rate that is higher than the revenue growth rate. We expect the company's EPS to be 1.28/1.45/1.61 yuan in 2023-2025, giving 19 times the PEE of 23 years (because some of the company's varieties are involved in harvesting, which is discounted 24 times the average PE value in 23 years), with a target price of 24.32 yuan to maintain the “increase in holdings”.

Infusion sector: 1Q23 benefits from the recovery of hospital-side diagnosis and treatment. The infusion sector is expected to contribute strong growth throughout the year to 1Q23 revenue of 880 million yuan (+34.8% yoy). The recovery in growth rate is mainly driven by demand from fever clinics in key sales regions (such as Henan, Anhui, etc.) and a recovery in hospital-side diagnosis and treatment volume. Looking ahead to 2023, we estimate that the infusion sector is expected to impact 20% revenue growth. Considering: 1) demand for major infusion diagnosis and treatment may continue to recover in the next quarter; 2) plastic bottles and soft bags are in place and are expected to continue to increase; 3) high-value-added BFS (sealed polypropylene bag infusion) is the company's exclusive product, which is optimistic about conquering first-tier cities and high-end hospital markets; 4) the share of nutritional and therapeutic infusion varieties will gradually rise, and we are optimistic that subsequent new product launches will drive the gross margin of the infusion sector upward.

Non-infusion sector: chronic disease/specialty sector has stabilized overall. We are optimistic that new products won bids for volume purchases to provide incremental revenue of 1.83 billion yuan (-0.4% yoy) in the non-infusion sector. We are optimistic that the sector's revenue will return to high single-digit growth in 23. The main reason is: 1) The income of the chronic disease sector is expected to be corrected in 23 (1Q23 revenue fell 8.8% yoy year-on-year, mainly due to sales of some old varieties being dragged down by sales of previous varieties), mainly due to subsequent volume collection based on volume collection in exchange for price, and the eighth batch of potential products collected in '23 involving potential new products, the seventh batch of the winning varieties Fusuiyue, Betzling, and Nifedipine controlled-release tablets With continued sales, sales of non-collected varieties such as Presdelta, Sugar Shifin, and Novartis grew steadily; 2) The specialty sector is optimistic about steady growth during the year (1Q23 revenue increased 6.2% year-on-year), mainly benefiting from abdominal diarrhoea, the recovery of magnesium valproate tablets/sustained-release tablets, and the rapid release of pregabalin after winning the bid.

Strategic transformation: Cost reduction and efficiency are ongoing, and endogenous+extension enrichment innovation/imitation dual-platform companies are expected to accelerate the improvement of refined cost management and capacity utilization, and improve profitability based on the broader context of state-owned enterprise reform. In addition, the company is actively seeking innovative strategic transformation: 1) building a generic drug cluster, which has formed 5 differentiated platforms; 2) focusing on innovative drug layout and increasing BD efforts. We are optimistic that the company will sign a contract with Ligand to obtain approval for the CX2101 project in Asia, and the development of its own Fascin protein inhibitor anti-tumor platform and anti-viral prodrug technology platform. In the future, we are optimistic that the company will increase its R&D efforts and the pace of outreach, and continue to expand its product line in the fields of pediatrics, neuropsychiatry, anti-cancer, etc.

Risk warning: The recovery of large infusions fell short of expectations, and the price reduction of collected varieties exceeded expectations.