Key points of investment
Financial Overview: Operating income and net profit after deducting non-net profit for the first half of 2016 were 3.34 billion yuan and 400 million yuan respectively, with year-on-year increases of 0.4% and 3.5% respectively. 2016Q2's operating income and net profit after deduction were 1.82 billion yuan and 230 million yuan respectively, with year-on-year increases of 0.8% and 16.4% respectively; the company also predicts that the net profit growth rate for January-September 2016 will be about 0%-30%.
The growth rate of performance in a single quarter resumed, and the overall level of profit increased. The revenue for the first half of 2016 was about 3.34 billion yuan, an increase of about 0.4% over the previous year. Among them, pharmaceutical products were about 93 billion yuan, an increase of about 6.2% over the previous year; agrochemical products were about 2.26 billion yuan, an increase of about 0.2% over the previous year. Non-net profit after deducting non-net profit for the first half of 2016 was about 400 million yuan, an increase of about 3.5% over the previous year. The net profit growth rate was about 3 percentage points faster than the revenue growth rate. The main reason was that the company's gross margin increased by 2 percentage points due to changes in product structure. Looking at the breakdown, the revenue ratio of homegrown products increased among pharmaceutical products with higher gross profit. Overall, not only did revenue increase 6.2%, but gross margin increased by about 6 percentage points at the same time; the share of revenue from pesticide chemical products with low gross profit declined by about 2 percentage points; currently it is about 68%. The net profits of subsidiaries Huabang Pharmaceutical, Yingtai Jiahe, and Baisheng Pharmaceutical in 2016H1 were about 110 million yuan, 180 million yuan, and 105 million yuan respectively, with year-on-year increases of about 22%, 16%, and 5%, respectively. Among its subsidiaries, Baisheng Pharmaceutical's growth rate is slow. The main reason is that the tax refund progress is lower than expected. For example, judging from the industry situation, the tax rebate may be reflected in the second half of the year, and Baisheng is likely to fulfill its 2016 performance promise. For example, looking at a single quarter, 2016Q2's net profit after deduction increased 0.8% and 16.4% year-on-year respectively. The profit growth rate was positive for the first time in the past three quarters. There was a reversal in the growth rate. We judge that the growth rate of the company's agrochemical business performance has recovered and continued to be optimistic throughout the year.
The Big Health layout has been gradually improved, and future profits have gradually become clear. 1) The field of rehabilitation continues to be strengthened. Relying on high-quality medical resources from heavy medicine, strengthening rehabilitation medical cooperation with the Department of Heavy Medicine, and gradually developing in the direction of specialist rehabilitation, it is estimated that the number of rehabilitation hospitals nationwide will reach 10 in 2017-2018. With the implementation of the international rehabilitation medical project Rhein-Eaton Hospital, rehabilitation concepts and models from abroad will later be introduced into the country and promoted and replicated. Expectations are strong; 2) Strengthen the advantages of drugs for skin diseases and connect with online and offline resources. The company is a pharmaceutical leader in the fields of dermatology and tuberculosis, and vigorously promotes the dermatology internet strategy, OTC strategy, and rich product reserves to ensure the steady development of the company's pharmaceutical business; 3) Lay out advanced biotherapy fields.
The capital increase and acquisition method obtained about 30% of Life Origin's shares. At the same time, it acquired about 70% of Swiss Biotech's shares through a subsidiary, focusing on advanced cancer treatment technology and gradually improving the “Greater Huabang Medical Alliance” layout; 4) Business sorting continued. The agrochemical business is listed on the New Third Board and operates independently. In the future, the resources of listed companies will focus on the pharmaceutical sector. Other non-medical subsidiaries may also have independent financing expectations, such as Hanjiang Pharmaceutical, the main API company, and Taibaishan Tourism, a tourism company.
Profit forecast and valuation: We expect the EPS for 2016-2018 to be 0.34 yuan, 0.42 yuan, and 0.50 yuan respectively (the original forecast for 2016-2017 EPS was 0.49 yuan and 0.61 yuan respectively. The reason for this adjustment was the impact of weighting, changes in revenue structure, gross margin, etc.). The corresponding price-earnings ratio was 28 times, 23 times, 19 times, respectively. The company's performance growth rate is stable, and the big health strategy is progressing steadily. Expectations for outreach in the field of rehabilitation are strong, maintaining the “buy” rating.
Risk warning: Product sales may fall short of expectations, risk of product price reduction, progress of major health strategies, or low expectations.