Matters

The company resumed trading earlier and issued the “Plan for Issuing Shares to Purchase Assets and Related Transactions”, which plans to purchase a total of 50% of the minority shares held by Intel Pharmaceutical, a subsidiary of the company, by issuing shares to related parties of the company. We recently conducted research on the company and exchanged concerns.

According to the fixed increase plan, the company plans to privately issue 57,142,856 A-shares to Huachen Investment, the largest shareholder of the company, and Huazi Industrial, the second largest shareholder, to purchase a total of 50% minority shares of Inter Pharmaceutical, a subsidiary of the company that they jointly hold, to complete the company's wholly-owned holding of Inter Pharmaceutical. The issue price is 14.07 yuan/share, the estimated value of the underlying assets is 8040 million yuan, and the lock-up period is 36 months. The actual controller of the company did not change before and after issuance; it is still Sinochem Group.

Key Views

1. Solve the problems left over from history and clear the obstacles to future development.

Inter Pharmaceutical has always been the source of almost all of the company's revenue and profit, but the company was unable to successfully recover 49% of Inter Pharmaceutical's shares in the early stages of development due to financial pressure and other reasons, which hindered the company's sustainable and healthy development. As the company's acquisition of Inter Pharmaceutical's remaining shares gets on the right track, on the one hand, it will directly increase the company's net profit and net asset size, while also laying a solid foundation for the company's long-term and orderly development in the future. After the acquisition was completed, Sinochem Group indirectly held 33.24% of the company's shares through Huazi Industrial, Hualong Real Estate, and Dongpu Industrial. It was still the actual controller, while the Zhejiang State-owned Assets Administration Commission indirectly held 31.05% of the company's shares through Huachen Investment, Huiyuan Investment, and Zhejiang Guomao.

2. It is located on the cusp of medical reform in Zhejiang, and good winds can be expected in the future.

Zhejiang's medical reform policy has always been at the forefront of the country. From “zero price differences” for public hospitals that were rolled out throughout the province in the early days, to the drastic price reduction in centralized drug procurement, to encouraging public hospitals and primary medical institutions to set up medical consortia to carry out a second round of bargaining, etc., every time a medical reform policy in Zhejiang Province is both an impact and an opportunity for related industries. However, as a leading enterprise in the pharmaceutical distribution field in Zhejiang Province, the company has, on the one hand, established cooperative relationships with 40 of the world's top 50 pharmaceutical companies and the top 100 domestic pharmaceutical companies. On the other hand, it has achieved full coverage of medical institutions and pharmacy chains above the county level, and the coverage rate of primary medical institutions has reached close to 90%. We believe that with the integrated layout that has been painstakingly built in Zhejiang Province over many years, the company is expected to take the lead in exploring and transforming into a new business model by taking advantage of the medical reform policy.

3. Actively exploring mobile connectivity has great potential for outreach development.

The company has vigorously developed e-commerce, and has built a complete O2O platform for B2B business with “Intel Pharmaceutical Valley”, thereby achieving online integration of offline business, which not only improved transaction efficiency, but also increased customer stickiness upstream and downstream of the industrial chain. At the same time, the company cooperated with the Zhejiang Food and Drug Administration to achieve real-time supervision of drug transactions and drug flows, laying the foundation for further cooperation in the future. Furthermore, the company is also actively exploring B2C business. Currently, the number of retail pharmacies under the company has reached 53, concentrated in Hangzhou, Shaoxing and Ningbo. It fully has an offline foundation for B2C business, and future development is worth looking forward to.

4. Investment advice.

Since the company's wholly-owned holding of its major subsidiaries will directly increase the company's net profit and net asset scale and lay the foundation for future healthy and orderly development, and at the same time, as a leader in the pharmaceutical distribution field in Zhejiang Province, it is expected that the company will actively explore mobile internet to bring room for imagination. Furthermore, we expect the company's diluted EPS in 2015-2017 to be 0.59 yuan, 0.72 yuan, and 0.87 yuan respectively, and the corresponding PE will be 70.86 times, 57.76 times, and 47.64 times, respectively. The company's current market sales rate is only 0.59 times, which is at the lowest level in the industry, and we continue to maintain our “recommended” rating.

Risk warning

1. The company took longer than expected to complete the acquisition.

2. The degree of aggressiveness of health-care reform policies has exceeded expectations.