Core ideas:

1. Event

Recently, we have communicated with listed companies. The company's main business is in the field of in vitro diagnostic reagents (IVD), which is divided into three parts: reagents, instruments and services. We expect that the reagent and instrument business will maintain steady growth in the future, and the service business will achieve high growth due to the gradual mixed development of domestic independent laboratories. We expect the company's overall operating revenue to maintain a growth rate of more than 30% in the next three years.

two。 Our analysis and judgment

(1) the transformation of independent laboratories into mixed operations, and the growth rate of service business to a higher level.

The format characteristics of independent laboratories are gradually evolving from independent private third-party institutions to joint laboratories and regional inspection centers with mixed characteristics. Independent laboratories such as Daan Genome, Dean Diagnostics, Meikang Biology, Jinyu Test and Adikon, which were developed after 2000, are defined as traditional independent laboratories, that is, third-party diagnostic centers that need a license. the development of laboratory business outsourcing mode. But the national policy on independent laboratories has been evolving: in 2009, the development of independent laboratories was gradually standardized; in 2013, the laboratory departments of public hospitals were encouraged to provide testing services; and in August this year, the Health and Family Planning Commission issued a paper, the laboratory departments of public hospitals can set independent qualifications. Through the change of policy, we find that the operation mode of independent laboratory is gradually public: from the original commercial and private third-party diagnostic center, it has developed into a joint laboratory and regional testing center with mixed characteristics in terms of management rights and regional monopoly. The joint laboratory is aimed at the lower reaches of the laboratory, providing both services and products through packaged collection. For example, Runda and Cyrus operate jointly with the hospital laboratory, as a mixed joint laboratory, which can not only do packaging collection for the laboratory, but also provide services for the lower reaches of the laboratory. On the other hand, the regional inspection center further concentrates local medical resources on the basis of the existing joint laboratories.

Under the new business model, the core of the operation of the new independent laboratory is how to cooperate with public hospitals. Hospitals have the demand for the development of laboratory departments. under the current national policy of controlling the proportion of drugs, the income of inspection services is the key to ensure hospital income. The annual income of the laboratory accounts for 10% of the total income of the hospital, and the scale of the income is much larger than that of the traditional independent laboratory. For example, at present, the largest independent laboratory has an annual revenue of 200 million yuan, while the revenue of the Laboratory Department of Guangzhou Provincial people's Hospital reached 100 million yuan 10 years ago and is now close to 400 million yuan. And the hospital laboratory still has a lot of room for development: at present, there are less than 1100 charging items for the laboratory departments of public hospitals in our country, while 5000-6000 charging items of the same type abroad. The hospital has the demand to expand the laboratory, but it is lack of funds, so the logic of establishing a joint laboratory between the manufacturer and the hospital is reasonable, and the high growth in the future is also expected.

The company's service business will achieve high growth with the help of new business type, an independent laboratory under tertiary therapy. At present, the company has 100-200 joint laboratories and plans to gradually develop into a regional inspection center in the future. In the first half of 2016, the company's service business achieved revenue of 340 million yuan, an increase of 78.4% over the same period last year, mainly due to the independent laboratories of the new model. We expect the company's service business to maintain a rapid growth of 40% in the future.

(2) Reagent business has maintained steady growth

The company's PCR-based reagent business maintains a growth rate of more than 20%. According to the 2016 semi-annual report, the company's reagent business achieved revenue of 310 million yuan, an increase of 24.6% over the same period last year. The company's reagent business is divided into molecular, immune and biochemical reagents, in which molecular reagent business mainly comes from listed companies, immune reagent business mainly comes from holding company Dari Biology and wholly-owned subsidiary Zhongshan Biology, biochemical reagent business share is small. The company is the largest direct marketing system in the IVD industry. 90% of PCR products are sold directly, accounting for about 70% of the total revenue of reagents.

The molecular diagnostic market is dominated by domestic enterprises, and there is no import substitution problem of molecular diagnostic reagents. According to the classification of diseases, the company's molecular reagent products can be divided into infectious diseases (hepatitis infectious diseases, respiratory infectious diseases), venereal diseases, gynecology and tumors, etc. according to the order of income from high to low, they are infectious diseases, tumors, STD testing, eugenics and good care. In the IVD market, the only products dominated by domestic enterprises in the price and market are molecular diagnostic products. Because there is little difference between the related instruments in the field of molecular diagnosis at home and abroad, the price of the product depends on the reagent. The company has realized that the raw materials of molecular diagnostic reagents are 100% self-produced, so the company's molecular reagent products do not have the problem of import substitution, and the product sales of Novartis and other companies are far lower than those of domestic enterprises.

The company's revenue of blood screening products is expected to be 5000-60 million yuan this year. Blood products are scarce resources, and they are the only products in China's pharmaceutical industry that have risen in quantity and price this year. The company's main customer is the blood station, according to estimates, it is estimated that the current market blood stock of more than 2000 bags, annual blood collection of about 50 million tons, each ton of blood can be divided into more than 1800 tests, the blood screening market size of about 10-2 billion. Compared with Roche and Novartis, the company's products have price advantages: the prices of Roche and Novartis blood screen products are more than 50 yuan, and the price of the company's products is not more than 30 yuan according to the national standard.

(3) the cost of NIPT is well controlled, and the terminal price reduction will help to increase the volume of products.

Although there are some problems with the company's NIPT business model, the cost control is better. Compared with Huada and Berry he Kang, the company's NIPT business coverage is at a disadvantage: Huada and Berry cooperate with the government to cover by province; although the company covers dozens of hospitals mainly in central hospitals and maternal and child health care hospitals, the volume of business is small. However, the company's cost control is better: the company uses LifeTech's Proton sequencer to do production screening testing, compared with Illumina Inc sequencer, Pronton has two advantages: 1. Sequencing flux is suitable for NIPT,Illumina sequencing flux is too large to cause waste; 2. The price is lower. The price of Life Proton is about 2 million yuan per unit, while that of Illumina Inc is more than 4 million yuan per unit. At present, the company's branded Life Proton sequencing instruments can sell 20-30 sets per year, with a terminal price of 2.3-2.5 million yuan per unit, corresponding to 4000-50 million sales revenue.

The terminal price of NIPT products is reduced rapidly, and the penetration rate of health insurance will be greatly increased. Now the terminal price of NIPT has dropped from 2000 yuan last year to 1000 yuan, such as Zhejiang about 1200 yuan per time, Hubei about 1400 yuan per time. We estimate that the terminal price may drop to 700-800 yuan next year, and we are expected to enter health insurance when the price falls to 500-600 yuan. At present, the average annual number of newborns for women and children in the province is about 20, 000. For example, there were 29000 newborns in Nanjing last year. Calculated at 30% to participate in NIPT,1000, Nanjing's market share is 6 million yuan. And NIPT business in each region will not be monopolized by one supplier, at least 2-3 suppliers are guaranteed.

(4) the slow progress of additional offerings will not affect the development of the company.

At present, the company's non-public offering of shares is temporarily at a standstill. In October 2015, the company agreed to implement the employee stock ownership plan to participate in the subscription of the company's non-public offering shares in 2015 through a fixed increase plan. However, at present, the issue of additional issuance is temporarily at a standstill, because the company is a school-run enterprise, and the major shareholder and the two shareholders have a special background: the major shareholder is Sun Yat-sen University, and the second shareholder is the Guangzhou Municipal Government. The substantive work of the company needs to be carried out in accordance with the internal management measures of state-owned assets, and the additional issuance needs to be approved by the Ministry of Education and the Ministry of Finance, and only after the approval of the general meeting of shareholders and the approval of the China Securities Regulatory Commission. Although the company has not had any additional issues or employee incentives since its listing, it has not affected the development of the company, and its market capitalization is considerable. The company has not implemented any additional offerings or employee incentives since its listing: on March 29, 2016, the company terminated the first phase of the equity incentive plan; at present, the non-public offering of shares is temporarily at a standstill. However, since the company went public in 2004, its market capitalization has grown from more than 1 billion to nearly 20 billion, peaking as high as 40 billion. And the bank gives the company a credit line of 1 billion yuan to supplement working capital, so the company's demand for additional issuance is not high, and the slow progress of additional issuance will not affect the development of the company.

3. Investment suggestion

It is predicted that the EPS from 2016 to 2018 is 0.18, 0.23, 0.31 yuan, respectively, and the corresponding PE is 87 times that of 154, 120, respectively. The company is a leading enterprise in the domestic IVD industry. Under the premise of maintaining the current growth rate of reagent and instrument business in the next three years, with the mode of independent laboratory gradually changing from an independent private third-party organization to a joint laboratory and regional inspection center with mixed characteristics, the company's service business will achieve a rapid growth of 40%. We are optimistic about the company's long-term development prospects and suggest that we pay attention to it. There is no investment rating for the time being.

4. Risk hint

The cooperation between new business type independent laboratory and hospital is not as good as expected.