Incident: The company released its 2017 quarterly report, achieving operating income of 2.43 billion yuan (+21%), net profit of 220 million yuan (+15%), and net profit of return to mother of 200 million yuan (+38%) after deduction.
Performance has returned to a high growth trend, and cardiovascular drugs have significant advantages. The company's revenue growth rate and profit growth rate after deduction both showed a clear recovery. We estimate that the main reason is that the company's sales have returned to normal, and the sales growth rate of various products has picked up. The company is the largest manufacturer of proprietary Chinese medicines for cardiovascular and cerebrovascular drugs in China. The three core varieties of Danhong Injections, Neocentric Capsules, and Stem Heart Granules are positioned as the primary clinical terminal drug market for proprietary Chinese medicines in China, with a total sales revenue of 9 billion yuan in 2016. The three major drugs developed on the basis of the brain-heart coordination theory all focus on common chronic diseases such as arrhythmias, insufficient blood supply, and stroke. Their curative effects have been tested over a long period of time in the market, and it is expected that the annual growth rate will return to around 15%. In terms of profitability, gross margin and net interest rate of 81.42% and 9.08% respectively are at historically low levels, while the period rate of 68.47% is at historically high levels. We estimate that rates are expected to gradually fall back and profitability will return to normal levels throughout the year after leveling. High performance growth is worth looking forward to.
The product pipeline continues to expand, and specialized marketing and promotion covers the whole country. In terms of R&D, the company is based on major disease fields such as cardiovascular, cerebrovascular and gynecology, and continuously broadens the R&D pipeline, covering major chronic diseases such as cardiovascular, gynecology, tumors, diabetes, and respiratory diseases, combining the company's strong R&D capabilities and extensive marketing channels to cultivate large products. The company has earned more than 1 billion dollars from 10 varieties, more than 50 million from 17 varieties, and more than 180 varieties under research, which have a leading edge in the fields of proprietary Chinese medicine and health. In terms of sales, the company uses brain-mind coordination as a theoretical basis to carry out professional academic promotion, prove the efficacy of products using evidence-based medical methods, and transform the academic advantages of products into market advantages. The company has a professional sales team of close to 3,000 people. The division is responsible for refined specialty product sales, covering hospitals, OTC and commercial channels in 34 provinces and cities across the country, effectively promoting the launch of the company's products.
Profit forecasts and investment recommendations. The 2017-2019 EPS is expected to be 3.24 yuan, 3.90 yuan, and 4.61 yuan respectively, and the corresponding PE is 25 times, 21 times, and 18 times, respectively. Considering the company's obvious advantages in products, R&D and marketing, and the recovery in performance growth, we covered it for the first time and gave it an “increase in holdings” rating. The company was given 30 times PE in 2017, and the corresponding target price was 97.20 yuan.
Risk warning: risk of price reduction in drug tenders, risk of drug sales falling short of expectations.
