Main points of investment:

1. Event

We have followed the company recently.

two。 Our analysis and judgment

(1) the commercial sector has benefited from national policies and fixed increases, and mergers and acquisitions have continued to move forward.

Pharmaceutical business is currently the main business of the company, after the early business adjustment, the current pharmaceutical commercial income accounts for more than 93%. At present, the company has a layout in 9 provinces, although the number is small compared to the 13 provinces in the country, but the provinces with a large population base and mature development (such as Henan, Hubei, Shandong, etc.), the corresponding pharmaceutical market capacity is large, a single province can have hundreds of billions of markets. As a result, the company's business has enjoyed a high growth rate of about 20% in recent years, much higher than the industry average.

The current national policy supports large pharmaceutical commercial companies to continue to become bigger and stronger, and the two-vote system + business reform makes small commercial companies increasingly lose their foundation for survival, which in turn promotes them to be merged and acquired by large companies. Taking advantage of the policy, on the one hand, the company continues to accelerate its expansion in Shandong, Henan, Hubei and other provinces through mergers and acquisitions; on the other hand, it integrates its pharmaceutical commercial companies and sets up six regional group companies with the province as a unit. At the same time, we should adopt equity incentive and issue performance targets. If it can be successfully completed, the listed companies promise to buy back five years later, at the price of 8-10 times the audited operating net income per share in 2021, which has greatly stimulated and successfully promoted the drive of all regions. Therefore, in the future, the company's business in Henan, Shandong, Hubei and other regions is expected to achieve high-speed or even double growth.

With the help of policy and financial advantages, the company is expected to continue the pace of mergers and acquisitions in the field of circulation in the future. In terms of policy, national policies such as the two-vote system promote large circulation enterprises, including companies, to move forward, reducing the obstacles to acquisition and the difficulty of negotiation, and even many small enterprises take the initiative to be acquired by large enterprises. therefore, in the future, the company is expected to continue to acquire small enterprises, and it is also possible to expand to other provinces other than 9 provinces. In terms of capital, the company has abundant funds: at present, an increase of 3 billion has been received, and it is also prepared to issue corporate bonds and other financing means such as short-term financing and winning votes, with a total scale of 2.1 billion. Abundant funds will help the company to continue mergers and acquisitions and expansion.

The company has demonstrated a strong integration ability in the past M & A history, even if the target is acquired on a small scale and the business volume is not high, it can also achieve rapid improvement after M & An integration. For example, after the company acquired Henan Dongsen, the revenue scale of the target increased from 344 million yuan in 11 years to 690 million yuan in 16H1, and the annual operating income increased more than three times. In the future mergers and acquisitions, the company will continue to pay attention to and inspect the target management team, agent varieties and hospital resources, and sign a gambling agreement after the merger to make requirements for the profitability of the target. Through this strengthening of management, the company will be able to continue its strong integration ability in the future and promote the rapid development of the target.

(2) the whole Pharmaceutical Network was selected as Shenzhen GPO, and the company's distribution business is expected to cooperate with the bidding of Shenzhen Public Hospital Pharmaceutical Group Purchasing Organization, and the preliminary preparation work has been completed. Quan Pharmaceutical Network, a subsidiary of Haiwang Group, a controlling shareholder, was selected as the purchasing organization of public hospital drug group by Shenzhen Health and Family Planning Commission in August 16, which is responsible for 80% of drug procurement in public hospitals. At present, the preliminary preparatory work has been completed, all public hospitals have signed an agreement with the whole drug network, the whole drug network has been ready for distribution, is expected to start distribution in the near future. According to the provisions of the Shenzhen Health and Family Planning Commission in the reform pilot program, the total cost of drugs purchased centrally during the trial period is more than 30% lower than that of purchasing the same number of drugs on the Guangdong Provincial Pharmaceutical Electronic Trading platform in 2015. After the negotiation of the whole drug network, the relevant manufacturers and varieties have accepted the price reduction requirements, the overall price reduction target of 30% can be achieved, and the whole drug network still has a certain profit space.

Subsidiaries of listed companies are also selected as distribution enterprises, which is expected to form a certain degree of coordination with the whole pharmaceutical network. At the end of September, according to the documents of Shenzhen Health and Family Planning Commission and combined with the existing drug circulation market pattern in Shenzhen, a total of 30 distribution enterprises were selected by the whole Pharmaceutical Network, Shenzhen Health and Family Planning Commission and hospitals. These include Shenzhen Shenye Pharmaceutical, a subsidiary of a listed company. It is expected that the whole pharmaceutical network and Shenye Pharmaceutical can form a certain degree of cooperation: in terms of share, the distribution share obtained by Shenye Pharmaceutical should not be lower than that of other distribution enterprises; in terms of gross profit margin, as the whole Pharmaceutical Network is responsible for determining the distribution price (according to the "Procurement regulations") and arranging the specific regulations for the distribution of specific distribution enterprises (according to the "implementation Plan"), the gross profit margin obtained by Shenye Pharmaceutical can also be guaranteed and will not be lower than that of other enterprises. In addition, if the whole drug network wins the bid for procurement in other areas in the future, the company is also expected to continue to participate in cooperation.

(3) operate proton therapy and acquire high-end medical equipment operators, and enter the high-end hospital market to become the exclusive operator of Provision Group Proton Therapy system in China, which is expected to break the distribution business into more high-end hospitals. In May, 16, the company announced that it would buy shares in Provision Healthcare, jointly set up a Chinese joint venture with American Provision Group and exclusively operate Provision Group Proton Therapy system in China, and will first sign agreements in Heilongjiang Cancer Hospital, Tianjin and other hospitals. In terms of certification, Provision Group's new equipment has been certified by FDA in the United States in December last year, and it still needs to be certified by the China Food and Drug Administration in China before it can be put into operation, and the company will work with partners to carry out domestic certification work in an orderly manner in accordance with relevant regulations. In terms of cooperation mode, the company has become the exclusive operator of Provision Group in China, responsible for equipment maintenance, sales, etc., can choose to co-build with the hospital or hospital self-construction, the company to provide equipment and maintenance. In terms of profitability, proton therapy business in China is scarce and very popular. At present, the treatment quota of the existing Shanghai Proton Therapy Center has been filled in two years, and the price of one treatment is more than 200,000 yuan. The company can make a profit from operating proton therapy system in three aspects: 1. The use of equipment (which does not make much profit), 2. Late service; 3. The extension of distribution business. One of the most noteworthy is the extension of the distribution business, because the high-end business such as proton therapy can only be affordable by large hospitals, and the company is expected to make its distribution business into high-end hospitals through this cooperation.

Also for the purpose of obtaining top hospital resources, the company acquired high-end medical device agents in Beijing Jianchang. Beijing Jianchang is the main sales agent of high-end medical equipment and consumables in northern China, and the general agent of Leonardo da Vinci surgical robot in the northern region. it has the customer resources of medical institutions such as many famous third-class hospitals (such as 301 Hospital and Army General Hospital) in Beijing and the north, as well as the sales channels of high-end medical devices and innovative medical devices. In September last year, the company bought an 80 per cent stake in Beijing Jianchang for 216 million yuan, at a price of about 15 times PE. On the one hand, the acquisition of Beijing Jianchang can directly increase the company's profitability, enhance the sales scale, and help the company to expand the high-end medical device business. For this reason, the company has agreed with Beijing Jianchang on a 4-year performance commitment, and the performance is expected. On the other hand, after the acquisition of Beijing Jianchang, the company has obtained its original top hospital resources and business network, and in the future, it can build a national platform for the middle and high-end medical device plate based on Beijing Jianchang, and take this opportunity to send the company's circulation business to the top hospitals, which is also an important step for the company to develop the high-end hospital market.

(4) the pharmaceutical R & D sector shall independently become a profit department, promote foreign exchanges and cooperation, set up a wholly-owned subsidiary science and technology research institute, and transform the original cost department into a profit department. The company separated the original R & D department and set up an independent technology company "Haiwang Pharmaceutical Science and Technology Research Institute" and Haiwang Drug consistency Evaluation and Research Center. The institute is positioned as a joint, open and international R & D platform. On the one hand, it can provide services for listed companies to meet internal R & D needs; on the other hand, it can cooperate with the outside world. Facing the market, facing the society and cooperating with relevant scientific research institutes, industry brothers and so on. In the past, when the R & D department was within the company, it was difficult to cooperate with the outside, but now it will be easier to cooperate after independence.

After setting up the R & D business as a wholly-owned subsidiary, we can not only research and develop technology with internal and external cooperation, but also sell the technology. For example, in November, Haiwang Research Institute sold six raw materials and injections of ratetrexed, adefovir tablets, levofloxacin raw materials and injections, fasudil injections, tadalafil tablets and lamivudine tablets to Haiwang Pharmaceutical, a subsidiary of the controlling shareholder Haiwang Group, for 31 million yuan. At the same time, the company reserves no more than 20% of the equity at the level of Haiwang Pharmaceutical Research Institute, and implements equity incentives to the core management staff and R & D team of Haiwang Pharmaceutical Research Institute, which will be transferred to the team over four years (if the assessment is qualified). Help to improve the profitability of the sector. In the future, it is estimated that the business sector will contribute about 50 million yuan to the operating profits of listed companies.

3. Investment advice:

The company is a large comprehensive pharmaceutical company, after business adjustment and industrial slimming, pharmaceutical business as the main business, benefiting from the two-vote system and other national policies, sustained rapid expansion is expected. Relying on the background resources of Haiwang Group, the company can form good cooperation with other subsidiaries of the Group; the company has set up equity incentives and performance commitments for 3-5 years for its various business sectors and previous acquisitions and integrations. it helps to motivate the company's performance to grow steadily over a long period of time. It is estimated that the company's net profit for 16-18 years is 416 million yuan / 660 million yuan / 931 million yuan, corresponding to EPS of 0.140.23Compact 0.32yuan, corresponding to PE of 49-31-22 times. There is no investment rating for the time being, we will continue to follow up and give the investment rating in a timely manner.

4. Risk Tips:

The extension expansion of pharmaceutical business is not up to expectations, and the integration of mergers and acquisitions is not as expected.