Main points of investment

Recently, Xinhua Pharmaceutical released its annual report for 2015. during the reporting period, the company achieved operating income of 3.597 billion yuan, an increase of 0.20% over the same period last year. The net profit belonging to shareholders of listed companies was 83.0623 million yuan, an increase of 63.75% over the same period last year (net profit after deducting 40.9448 million yuan, an increase of 366.42% over the same period last year), EPS0.18 yuan. The profit distribution plan is 0.2 yuan (including tax) for every 10 shares.

We believe that the company, as a state-owned enterprise with a long history, has a relatively sound operation, the field of OEM international cooperation can provide steady performance growth, and the field of antipyretic and analgesic raw materials, as the leading enterprises in the industry, can obtain stable and good profitability; preparation products grow rapidly under the improvement of marketing, the proportion of business continues to increase, and the profitability of low-cost drugs is also improved under the guidance of policy. The relocation of production capacity is coming to an end, and costs are gradually returning to normal levels; the employee stock ownership plan to participate in non-public offerings is expected to further straighten out the governance mechanism and improve operational efficiency; and the cooperation with JD.com in prescription outflow under the promotion of policies is also expected to provide new business increments in the pharmaceutical business field. Regardless of the dilution of this IPO for the time being, we expect the company's EPS to be 0.19,0.23 and 0.27 yuan respectively from 2016 to 2018, taking into account the expected improvement in the institutional mechanism and the business expansion in prescription outflow, covering the "overweight" rating for the first time.

Risk hint: reform is lower than expected, new business expansion is lower than expected, and performance is lower than expected.