Key points of investment:

1. Incidents

Recently, we have tracked the business situation of Longjin Pharmaceutical and carried out research activities. The main contents are as follows.

2. Our views

(1) Private enterprises dedicated to injecting Dengzhanhua preparations in the cardiovascular and cerebrovascular fields

Kunming Longjin Pharmaceutical Co., Ltd. is a pharmaceutical enterprise that mainly develops and produces natural botanicals and chemical freeze-dried powder injections. It is mainly dedicated to 10 types of pharmaceuticals, including dengzhanhuaxin for injection, sodium ferulate for injection, and water-soluble vitamins for injection. Among them, the main product is dengzhanhuaxin lyophilized powder injection. Kunming Qunxing Investment Co., Ltd. holds 87.75 million shares, accounting for 43.82% of the total share capital, and is the actual controller of the company; Hong Kong Lixing Industrial Co., Ltd. holds 47.25 million shares, accounting for 23.60% of the total share capital, and Yunnan Huixinsheng Investment Co., Ltd. holds 15.15 million shares, accounting for 7.57% of the total share capital, 50.25 million shares in circulation, accounting for 25.09% of the total share capital.

The company's revenue for the first three quarters of 2015 was 136 million yuan, up 5.03% year on year, and net profit attributable to shareholders of listed companies was 440.163 million yuan, up 1.75% year on year.

(2) The subsidiary Beijing Science and Technology Innovation, a local CRO company with a certain reputation in the industry

The CRO industry means that large pharmaceutical companies outsource some non-core R&D processes, saving 30% to 50% of costs while improving efficiency. As a result, specialized pharmaceutical research and development outsourcing institutions have sprung up, and have gradually formed a considerable market size.

According to Business Insights data, in 2014, the global pharmaceutical CRO industry market size exceeded 40 billion US dollars, and China's pharmaceutical CRO market exceeded 30 billion yuan. From 2006 to 2013, China's pharmaceutical CRO industry maintained a compound growth rate of 33%. In 2013, China's CRO market exceeded 22 billion yuan, accounting for 9.2% of the total global CRO scale. Domestic CRO companies are mainly distributed in Beijing, Shanghai, Nanjing, Guangzhou, etc. On August 18, the State Council issued “Opinions on Reforming the Pharmaceuticals and Medical Devices Evaluation and Approval System”, putting forward requirements to speed up the inventory of registration approval documents for digestible drugs. The domestic backlog of 21,000 clinical approval applications for drugs will be digested within three years, and the number of new reports will reach 12,000 in the next three years. The number of clinical approvals approved each year will double what it is now, and the market will expand greatly. We expect the CRO industry to grow more than 40% after 2015.

Beijing Chuangli Kechuang Pharmaceutical Technology Development Co., Ltd. was established on March 20, 2003. In 2008, in order to further enhance R&D capabilities and reserve R&D talents, the company acquired Beijing Science and Technology Innovation. As a CRO company, that is, an outsourcing service agency for pharmaceutical R&D contracts, in addition to providing support to Longjin Pharmaceutical, Beijing Kechuang is also engaged in certain pharmaceutical R&D business abroad, continuously accumulating R&D experience, and at the same time obtaining certain economic benefits. After more than 10 years of growth, it has a certain reputation in the CRO industry. It has gradually entered the field of chemical medicine since it was originally mainly traditional Chinese medicine. Beijing Science Innovation is focusing on helping the company find suitable varieties, mainly in the three categories of anti-cancer tumors, cardiovascular and cerebrovascular diseases, and diabetes, but it does not rule out other varieties, such as gynecological drugs and pediatric drugs. Its role is mainly an R&D center and project reserve, and the company has priority over its clinical varieties. In 2014, the revenue of Beijing Science and Technology Innovation reached 20.019 million yuan, and the overall loss was 3,4335 million yuan.

(3) The second shareholder, Lixing Industrial, has strong strength to help the company grow

Yunnan is rich in biological resources and is home to world-civilized medicinal herbs. Yunnan accounts for more than half of the varieties of Chinese herbal medicines in China, and Hong Kong Lixing Industrial, the company's second-largest shareholder, continues to invest in the development of the Yunnan biopharmaceutical industry.

In addition to investing 13 million Hong Kong dollars to establish Longjin Pharmaceutical, Lixing Industrial is also a shareholder of companies such as Panlong Yunhai, Dali Pharmaceutical, and 37 Technology.

Yunnan Panlong Yunhai Pharmaceutical Group Co., Ltd. is an international pharmaceutical enterprise group integrating drug development, development, production and sales. It has modern production bases, pharmaceutical research institutes, pharmaceutical management companies, real estate development companies, advertising agencies, etc. in China. Panlong Yunhai has set up more than 100 companies and offices at home and abroad, and has set up a domestic marketing network with Kunming, Beijing and Shanghai as the triangles, and Kunming, Sichuan, Zhengzhou, Beijing and Harbin as axes. In addition to detoxifying and nourishing capsules, the company's products also include Lingdancao granules, dragon lantern capsules, pain relief tablets, throat relief tablets, etc. In 2014, its revenue reached 500 million yuan and profit was about 50 million yuan.

Dali Pharmaceutical mainly manufactures and sells Chinese and Western medicine injections. Its core products are Shengnoujing Injection, Astragalus Injection, Shenmai Injection, etc. Among them, Shengnoujing Injection is a national second-level traditional Chinese medicine protected variety, ranking in the top three in the country, accounting for more than 90% of the company's total revenue. It is used to treat shock, coronary heart disease, viral myocarditis, chronic pulmonary heart disease, etc. in the national essential medicine catalogue. Dali Pharmaceutical needs 4 tons of raw materials every year. Currently, it is only 400 kilograms, and there is still plenty of room for its production capacity. In 2014, it achieved operating income of 339 million yuan and net profit of 100 million yuan.

Yunnan Sanqi Technology Co., Ltd. was established in 1998. The company specializes in APIs such as 37 total saponins, tofu pectin, and berberine hydrochloride. Among them, Yunnan Sanqi Technology Wenshan Branch is an extract production base mainly based on 37 total saponins, 37 polysaccharides, and 37 elements, with an annual output of 800,000 to 1.2 million tons of 37 saponins, and is currently the largest producer of 37 extract in China. The raw materials for injecting 37 total saponins cover 90% of the national market, and the raw materials for oral administration of 37 total saponins cover 70% of the national market. 37 Technology's market advantage is reflected in the fact that its second-largest shareholder founded the Pharmaceutical Group, which has offices in all provincial capitals and prefecture-level cities across the country, and its sales network covers 200,000 pharmacies and 3,000 large hospitals across the country.

(4) The concentration of the Dengzhanhua pharmaceutical industry is high, and advantageous enterprises gain more room for market development

The Dengzhanhua pharmaceutical industry is highly concentrated. The entire Dengzhanhua preparation includes tablets, water injections, and minute injections. Currently, it only accounts for 2.93% of all cardiovascular traditional Chinese medicine injections, and there is huge room for future development.

Currently, there are three major domestic manufacturers that produce Dengzhanhua preparations: Yunnan Biogalley Pharmaceutical, Hunan Hengsheng Pharmaceutical Co., Ltd., and Longjin Pharmaceutical. Since 2013, the three companies have collectively accounted for more than 98% of the Dengzhanhua formulation market. Dengzhanhuaxin for injection accounts for 45.45% of the total Dengzhanhua formulation market share in 2007 to 60% in 2012. The growth rate of the injectable dengzhanhuaxin market is significantly higher than the overall growth rate of the dengzhanhua formulation market. Currently, there are only two pharmaceutical companies, our company and Hunan Hang Seng Pharmaceutical Co., Ltd., and both companies only produce one variety of dengzhanhua preparations - dengzhanhua for injection, and have a strong leading position in the entire injectable dengzhanhualin market.

3. Investment advice

It is estimated that in 2015, 2016, and 2017, the company's profits will be 73 million yuan, 82 million yuan, and 90 million yuan, corresponding EPS of 0.37 yuan, 0.41 yuan, and 0.45 yuan, respectively, and the corresponding 2015-2017 PE is 124 times, 112 times, and 102 times. We believe that the company is in an absolute leading position in the cardiovascular and cerebrovascular injectable market. While consolidating its main business, it is vigorously developing new varieties and adhering to the “refined regional investment agent+professional academic promotion” marketing strategy. At the same time, Lixing Industrial, the second largest shareholder of the company, has strong strength to help the company grow. Its subsidiaries, Panlong Yunhai, Dali Pharmaceutical, and 37 Technology, are quite interesting, and there is huge room for long-term development. We gave the company a “Cautiously Recommended” rating.

4. Risk Reminder

The output of the upstream dengzhanhua planting industry fell short of expectations; the bidding situation in various provinces fell short of expectations.