Event: the company released the revised draft of the non-public offering plan on April 17 and the response to the feedback on the application for non-public offering on April 18.
The steady increase is progressing steadily. The company announced a non-public offering plan in August 2016, which intends to raise 600 million yuan for 1000 tons of traditional Chinese medicine formula granule project, 10000 tons of traditional Chinese medicine preparation project, technology research and development center project and repayment of bank loans, of which the employee stock ownership plan contributes 180 million. The management borrowed 60 million, and the issue price was 24.95 yuan. From the point of view of the revised version of the three-year fixed increase released by the company, the approval progress has been updated, and the core content has not changed. From the content of the feedback reply, the company implements the questions raised by the feedback one by one, and verifies, analyzes and demonstrates the related matters. We believe that the fixed growth of the company is making steady progress.
The company's hospital development exceeded expectations, and the results began to be released in the second half of 2017. According to the company announcement, the company has won the bid and signed a contract for hospitals at or above the second level in Zhejiang Province has reached 33, hospital development exceeded expectations. According to the estimates of about 600, 300 and 150 prescriptions per day for third Class, third B and second Class, we expect that the contribution income of this part will be about 300 million after completely getting on the right track. Traditional Chinese medicine formula granules into the hospital leading income, revenue ahead of profits, the company's 2016 sales of only 13 tons, revenue of more than 10 million. We expect to accelerate the release of traditional Chinese medicine granules from the second quarter of this year, with annual revenue of more than 100 million and net profit of about 20 million.
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. 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 is 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.
Investment advice: buy-An investment rating, 6-month target price of 37 yuan. We estimate that the company's net profit from 2017 to 2019 is 76.2 million yuan, 156 million yuan and 220 million yuan respectively, with a growth rate of 90%, 105% and 41% respectively. Excluding fixed increase and equity dilution, the corresponding valuation is 47x, 23x and 16x. The company's compound growth rate in the next three years is as high as 79%, corresponding to a 17-year PEG of much less than 1. The current market capitalization is only 4.2 billion, given the Buy-An investment rating, and the 6-month target price is 37 yuan. This is equivalent to 33 times the dynamic price-to-earnings ratio in 2018.
Risk hint: the sales of formula particles are not as expected, and the progress of fixed increase is uncertain.
