Main points of investment

Taicheng Pharmaceutical is a general medicine manufacturer in transition, and its products mainly include relieving cough and resolving phlegm, tonifying kidney, anti-infection and so on. The core varieties Zhikebao tablets and Jinkui Shenqi tablets are exclusive products, both of which are produced in China. In 2013, their combined sales revenue was 120 million yuan, with a gross profit of 96 million yuan, accounting for 35.11% and 64.39% of the total income and gross profit respectively.

In the short and medium term, the company has improved its profitability through active capacity restructuring: the gross profit of the core products Zhikebao tablet (OTC) and Jinkui Shenqi tablet (base drug) is as high as 80%. The share of sales in 2011-2013 increased from 29.9% to 35.1%, driving the overall gross profit margin from 39.8% to 43.4%. Based on the current capacity constraints, the company takes the initiative to adjust its capacity structure to give priority to the production of core varieties, which is expected to maintain rapid growth in the future. The driving factors for short-and medium-term growth mainly come from 1) the rapid expansion of three potential markets for Zhike Bao tablets; 2) the volume of the base drug market for Jinkui Shenqi tablets; and 3) the product growth space brought by the adjustment of production capacity structure and the construction of sales network.

In the long run, the release of fundraising capacity lays the foundation for long-term rapid growth. As a general pharmaceutical enterprise, the collocation of general medicine and exclusive varieties has established the strong profitability of the company. However, we believe that the solution to the capacity problem is for the company to embark on a healthy growth path, and according to the progress of the fund-raising plan, we expect the company to usher in a period of rapid growth starting in 2016.

The company plans to issue 25 million shares and raise about 322 million yuan for product line expansion, R & D and marketing network construction projects, including Zhike Bao tablets and Jinkui Shenqi tablets.

We estimate that the operating income of Taicheng Pharmaceutical in 2014-16 is 3.56,3.78 and 410 million yuan respectively, an increase of 3.8%, 6.3% and 8.4% over the same period last year, and the net profit belonging to the parent company is 0.84,0.90 and 103 million yuan respectively, up 23.7%, 23.8% and 25.1% respectively over the same period last year. Without the transfer of old shares, the diluted EPS of the upper limit of issued share capital (25 million shares) is 0.84,0.90,1.03 yuan respectively. In 2014, the reasonable relative valuation is 20-25PE, and the target price is 16.8-21.0 yuan.