Event

The company announced its mid-2017 report that its income was 150.19 million yuan, an increase of 0.6% over the same period last year; the net profit belonging to shareholders of listed companies was 27.26 million yuan, down 33.11% from the same period last year; and the net profit belonging to shareholders of listed companies after deducting non-recurring profits and losses was 26.475 million yuan, down 29.95% from the same period last year.

Comment

Entecavir 1H17 revenue growth rate of 9.2%, since the price reduction began with 2Q16, so the price in the first half of the year is much lower than the same period last year, sales growth is expected to be 25%, the second half of the year income growth is better than the first half of the year: entecavir 1Q16 revenue growth rate of 43.2%, matching the growth rate of 41.6% in 16 years, with the gradual implementation of new targets around the country, 4Q16 revenue growth rate is only 21.2%, so the impact of price reduction is about 20%. Based on 1H17 revenue growth of 9.2 per cent, 1H17 sales are still growing at 25 per cent.

The proportion of direct sales of the company has further increased, and the effects of low prices to higher prices and market expansion of tenofovir on sales costs are each about 5 million: with the construction of the company's direct sales team and the adjustment of the sales model under the two-vote system, the proportion of direct sales has increased to 59.8%. Direct sales mainly come from Entecavir's contribution. Tenofovir began to accelerate market access through the Entecavir channel, and customer margin increased by 28 million in the first half of the year, mainly for the development of margin for Norfovir Hospital.

Tenofovir sales are delayed and it is expected to be effective in the fourth quarter: at present, the company's provincial replenishment and hospital admission work is progressing smoothly, the company's current production capacity is limited, and a large number of goods are expected to be supplied in the fourth quarter.

Spending on new drug research and development continues to increase, dragging down performance in the short term, but it helps to maintain the company's leading position in the field of liver disease in the long run: 1H17 spent 27.3 million on R & D, an increase of 4.72 million over the same period last year; GST-HG151 (nonalcoholic steatohepatitis) has made phased breakthroughs and has submitted the research results to the Annual meeting of the American Association for the study of liver Diseases (AASLD).

The company plans to increase and upgrade its pharmaceutical manufacturing capacity, and at the same time set foot in regional medical services to form a genetic research, reproductive science, high-end maternal and child medical industry chain. The company intends to raise no more than 1 billion yuan from no more than five specific targets, and issue no more than 20% of the company's total share capital, that is, 28.37514 million shares.

A) nationalized pharmaceutical base project: according to American FDA and other international advanced standards, invest in the construction of preparation production base and API production base (including pilot workshop), pass international and domestic GMP certification, the project construction period is 2.5 years, the total investment is 599 million yuan, and it is proposed to raise 500 million yuan.

B) Fuzhou The UnitedFamilyHealth Guangsheng Maternal and Child Hospital construction project: through cooperation with The UnitedFamilyHealth Medical, it is planned to build a maternal and child health hospital in Fuzhou, where the company is located, in accordance with the high international standards. After the completion of the project, it has a total of 326 beds for obstetrics, gynaecology, pediatrics and postpartum maternal and child rehabilitation (high-end monthly center), which can provide high-level, one-stop high-end maternal and child health services. The construction period is 3 years, with a total investment of 583 million yuan and a plan to raise 500 million yuan.

C) on July 25, 2017, the company signed a Strategic Cooperation Agreement with Reproductive Genetic Innovations and LLC (hereinafter referred to as "RGI Chicago"). The two sides agreed through consultation that Guangshengtang would set up a wholly-owned subsidiary RGI China in China, with RGI Chicago to provide technical support, personnel training and platform construction, and carry out exclusive brand authorization and exclusive technical support and authorization for RGI in China, so as to build RGI China into a first-class international genetic research center with RGI Chicago technical level and certification standards.

Profit adjustment

Based on the slightly delayed volume cycle of tenofovir due to production reasons and the intensification of 18 years of competition, we revised the 2019 net profit of 2017 and 2018 from 0.72 to 0.65, with a corresponding growth rate of-2.53%, 78.39% and 56.02%, and the current stock price corresponds to about 45.4 times the 18-year Pamp.

Investment suggestion

Entecavir price reduction began with 2Q16, the impact of price reduction weakened in the second half of the year, and income growth is expected to stabilize; the new variety tenofovir has received the tenofovir "Drug GMP Certificate" on July 7, 2017, which can be officially supplied to the whole country. At present, the replenishment work has been completed in nine provinces. Through the model of "core province self-management + specific hospital agent", it is expected to contribute to the performance and maintain the "increase" rating in the second half of the year.

Risk hint

Product price pressure, low expected growth rate of new product sales, long hospital profit cycle drag short-term performance and so on.