Key points of investment
Incident: The company released its 2017 semi-annual report. It achieved revenue of 197.93 million yuan in the first half of 2017, an increase of 85.32% over the previous year; the mother's net profit was 25.7 million yuan, an increase of 66.44% over the previous year.
The merger of Zhuhai Xiangle is driving performance growth, and artificial crystals have plenty of room for growth: The main reason for the increase in the company's performance in the first half of 2017 was the operating income of 110 million yuan of artificial crystals brought about by merging Zhuhai Xiangle. Zhuhai Xiangle's main business is the import and sale of artificial crystals. It is the general agent of ARREN (ARREN) artificial lenses in China. The market share of this product is around 20%. As China's population ages and the penetration rate of cataract surgery increases, the domestic cataract lens market has huge potential. At present, the cataract rehabilitation surgery rate (CSR) in developed countries has exceeded 9,000 cases/million people per year, and although China's CRS has shown a rapid growth trend in recent years, reaching 1,351 cases/million people per year in 2015, the gap is still large compared to underdeveloped countries, and the incremental market is huge. With the expansion of the cataract surgery market, artificial lenses will continue to help the company's performance grow in the future. In addition, sales of the company's other important product, bio-type hard membrane supplement, fell 25.88% year-on-year in the first half of 2017 due to the influence of the “two-ticket system”. In the future, with the rationalization of sales channels, it is expected to return to a normal growth trajectory.
An artificial cornea can be expected in the second half of the year with the help of Lexiang in Zhuhai: corneal disease is the second leading cause of blindness in China. There are about 4 million blind patients with corneal disease in China. Some of these patients can recover through corneal transplantation. The number of corneal transplants in China has increased in recent years, and the level of technology has also improved markedly, but at present, the extreme lack of sources of corneal donors has become the biggest problem limiting the popularity of corneal surgery. The decellularized corneal graft developed by the company's participating subsidiary Youdeqing (holding 49.33% of shares) is a type of artificial cornea, which is expected to solve the pain point where hospitals are in short supply of corneas. This product was launched in June 2016. The raw material is the cornea of a pig's eye, and technical treatment solved problems such as immune rejection and preservation. After the product is transplanted into the human eye, the remaining part of the cornea of the human eye gradually fuses with the artificial cornea to promote the regeneration of the cornea of the eye, thereby achieving the purpose of treatment. The clinical indicator of blindness elimination is the return of strength to 0.01, and the clinical results of this product show that the average strength of patients receiving treatment can return to about 0.2, far higher than the standard for blindness removal. It is also currently the only artificial corneal product in China that uses declination as the treatment standard (competitor China's regenerated artificial corneal products mainly target corneal ulcers and cannot achieve blindness removal). The marketing team for decellularized corneal grafts in the first half of 2017 has been set up, increasing marketing efforts. At the same time, the company will also use the channel advantages of Zhuhai Xiang Le in ophthalmology to further promote sales of this product, which is expected to be released in the second half of this year.
Sales expenses are expected to gradually fall and performance will increase: As a result of the successive introduction of various new products in recent years, including ACI human chondrocyte repair technology (2013), Ario breast patches (2015), immune cell storage technology (2015), decellularized corneal grafts (2016), etc., the company's sales expenses ratio continued to rise, reaching 40% in the first half of 2017. With the gradual implementation of new products, the company's sales expenses ratio is expected to return to normal levels in the next few years, further enhancing the company's performance.
Investment advice: Excluding the dilution of non-public shares issued, we forecast the company's earnings per share from 2017 to 2019 to $0.34, 0.63, and $0.91, respectively. Considering the company's excellent clinical performance of artificial corneas, we gave the company a rating of -B to increase its holdings. The target price for 6 months was 25.5 yuan, which is equivalent to 75 times the price-earnings ratio of 2017.
Risk warning: Artificial corneal sales fell short of expectations, subsequent growth of artificial lenses fell short of expectations, and sales expenses increased too fast.