Event: the company announced that its revenue for the first quarter of 2017 was 326 million yuan, an increase of 6.13% over the same period last year, a net profit of 10.16 million yuan for shareholders of listed companies, an increase of 10.04% over the same period last year, and an increase of 10.54% for shareholders belonging to listed companies after deducting non-recurring profits and losses. At the same time, the company expects to achieve a net profit of 2037.61-26.4889 million from January to June, a year-on-year growth rate of 0.003%.
The performance is in the upper limit of the forecast, and the income of traditional Chinese medicine formula granules is expected to accelerate significantly from the second quarter.
The company's first-quarter growth rate of 10.04% was at the upper limit of-15%, slightly exceeding market expectations. We believe that the company's revenue contribution from traditional Chinese medicine formula particles will be significantly accelerated from the second quarter.
The company announcement revealed that at present, 33 hospitals at or above the second level in Zhejiang Province have won the bid and signed contracts, and the hospital development has 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 estimate that in 2017, the annual income of traditional Chinese medicine formula granules will exceed 100 million, with a net profit of about 20 million. On July 1, 2017, Zhejiang Province began to include traditional Chinese medicine formula granules into category B of health insurance, and the proportion of self-care was tentatively set at 5%, bringing a huge increase 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.
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 two-vote system has little impact on the company's circulation industry, and the company's wholesale business remains relatively stable. The company's wholesale business targets are mainly terminal customers at all levels of medical institutions and retail pharmacies in urban and rural villages and towns, and the sales ratio directly to end customers has been more than 90%, so the implementation of the two-vote system has little impact on the company's wholesale business. The company's advantage areas are mainly in Shaoxing, Hangzhou Yuhang and Xiaoshan, the company's hospital level is fully covered in Shaoxing, the third terminal drugstore and grass-roots are the company's advantages, deeply recognized by medical institutions. We expect the company's wholesale business to remain relatively stable, with revenue of about 1.2 billion yuan in 2017.
Investment advice: buy-An investment rating, 6-month target price of 37 yuan. We expect the company's net profit from 2017 to 2019 to be 76.17 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 45x, 22x and 16x. The company's compound growth rate in the next three years is as high as 79%, corresponding to 17 years PEG is much less than 1, and the current market capitalization is only 4 billion. Given the Buy-An investment rating, the 6-month target price is 37 yuan. This is equivalent to 33 times the dynamic price-to-earnings ratio in 2018.
Risk hint: policy progress is not as expected; accelerated competition leads to a decline in product profitability.
