Incidents:

Today, Zhongyuan Xiehe issued an announcement to purchase 100% of Shanghai Zhicheng Biotech's shares by issuing shares and paying cash. The purchase transaction price is 800 million yuan. Through this business integration, Zhongyuan Xiehe will enter R&D, production and sales of in vitro diagnostic products.

Reviews:

Zhongyuan Xiehe has entered the field of in vitro diagnostics: Zhicheng Biotech, acquired by the company this time, is one of the major companies in the domestic biochemical diagnostic reagent industry. Its self-produced products are mainly immunological diagnostic reagents, covering nine categories, including myocardial infarction, liver function, blood lipids, kidney function, and sugar metabolism, and can be matched with various biochemical analyzers. In terms of agent products, the company is the first-level agent of the British Landau Company in mainland China and one of the world's top three platinum agents from 2010 to 2012. The company's average compound annual growth rate has basically stabilized between 20% and 30%. According to the gambling agreement, Shanghai Zhicheng Biotech promised that net profit attributable to shareholders of the parent company after deducting non-recurring profit and loss in 2014, 2015, and 2016 would not be less than 52,351 million yuan, 64.356 million yuan, and 83.2519 million yuan respectively. The valuation compared to the purchase price of 800 million yuan is far lower than the current valuation of similar diagnostic reagent companies in Shanghai and Shenzhen. We think the purchase price is reasonable.

The added value of POCT products being developed by Newk Biotech is high: Newk Biotech, a subsidiary of Zhicheng Biotech, is mainly engaged in the development of POCT related products. Most of the reagent products are in the R&D stage, and it is expected that large-scale production and sales will occur within a few years. Currently, POCT products with high added value are rarely used clinically in China, and immunological diagnosis is still in the transition period from basic methodologies to advanced methodologies with higher added value; on the other hand, large-scale bioanalytical instruments are still commonly used for testing in China, and there are few convenient bedside testing products. The technical content of Newk Biotech's products being developed is higher than that of mainstream products in the current market, adding strong product reserves to the company. It is expected that it will lead the upgrading of the industry as an industry leader, but it will take some time for demand to increase. The biochemical reagent industry has a stable growth rate and high level of prosperity: Zhicheng Biotech's DENUO brand product line includes 70 biochemical diagnostic reagents, 2 types of immunodiagnostic reagents, and products such as “Newk Express Diagnosis”. Due to future pressure on hospitals to control medical insurance costs and policy factors such as double control and double reduction in charges by disease type in some regions, biochemical immune reagents are cost-effective as the initial screening method for diseases. In the future, biochemical reagents will grow steadily as the number of patients treated increases. It is expected that the industry will maintain an average annual growth rate of 10%-15%. Profit forecasts and company ratings: At present, the domestic market has formed a high level of recognition for the in vitro diagnostic reagent industry, and companies such as Kehua Biotech, Leadman, etc., and Xinhua Healthcare have all received high levels of valuation within the industry. We believe that the company is a pioneer in the stem cell industry. After the acquisition, it will facilitate the integration of the company's biological products industry chain. The purchase price is reasonable and the valuation is low. The acquisition will bring growth and stable cash flow to the company, which will benefit the company's future performance. Without considering the acquisition, we forecast the company's EPS for 14-16 to be 0.02, 0.03, and 0.04 yuan respectively. Corresponding to the closing price of PE on the previous trading day was 879, 733, and 597 times, respectively, which is relatively high, but considering that EPS is expected to rise to 0.18, 0.20, and 0.23 yuan respectively in 14-16 after the successful acquisition, and the high level of prosperity in the diagnostic reagent industry, we covered and gave a “prudent recommendation” rating for the first time.

Risk warning: You should pay attention to the risk of low profitability in the early stages of growth for a long time in the company's stem cell business, as well as the risk of integration after mergers and acquisitions.