Traditional Chinese medicine formula granules are expected to be fully integrated into health insurance in Zhejiang Province in July 2017, greatly improving the performance flexibility of the company's business. As early as 2010-2011, documents on the inclusion of traditional Chinese medicine formula granules into health insurance have been issued in Ningbo and Wenzhou, Zhejiang Province. starting from September 1, 2015, in hospitals of traditional Chinese medicine at or above the third level in Zhejiang Province (including hospitals of integrated traditional Chinese and western medicine), traditional Chinese medicine formula granules are included in the scope of basic medical payment. On October 27, 2016, the Provincial people's and Social Affairs Department issued the Circular on the trial classified Management of traditional Chinese Medicine slices in Zhejiang Province for basic Medical Insurance, Industrial injury Insurance and Maternity Insurance (draft for soliciting opinions). It is proposed that traditional Chinese medicine formula particles will be included in category B of medical insurance from July 1, 2017, and the proportion of self-care will be tentatively set at 5%. This also means that traditional Chinese medicine formula granules will be fully included in health insurance in Zhejiang Province, bringing huge increments to the market of traditional Chinese medicine formula granules in Zhejiang Province.
According to grass-roots research, we estimate that the market size of formula granules in Zhejiang Province in 2016 is 400 million, while the potential market size of only secondary hospitals is more than 500 million. Huatong Pharmaceutical, as the regional leader in the province, its performance flexibility has been greatly improved.
With the steady progress of the three-year fixed growth, the large participation in the employee stock ownership plan demonstrates the company's strong confidence in the future. In August 2016, the company announced a three-year non-public offering plan to raise 600 million yuan from Cao Guoxiong, Chen Baofang, Wu Yihui, Chen Huan and the company's employee stock ownership plan for traditional Chinese medicine formula granules and traditional Chinese medicine prepared slices project. With a market capitalization of less than 4 billion, the company's 180 million employee stock ownership plan participated in a large increase, of which the management borrowed 60 million, reflecting the company's strong confidence in future development.
Profit forecast and valuation: in view of the higher-than-expected progress of the company's admission of traditional Chinese medicine formula particles in Zhejiang Province and the gradual landing of policies in the province, we have significantly raised the company's profit forecast for 2017-2018. We expect the net profit from 2016 to 2018 to be 50.21 million, 98.8 million and 157 million respectively, regardless of the corresponding valuation of 78X, 40X and 25X, and the corresponding valuation of 82X, 46X and 29X. The company will have a compound growth rate of 78% in the next two years, far less than 1, and the current market capitalization will increase by only 4.5 billion, maintaining a "highly recommended" rating.
Risk hint: policy progress is not as expected; accelerated competition leads to a decline in product profitability.