Key points of investment
Incident: The company released its report for the third quarter of 2017. The first three quarters of 2017 achieved operating income of 16.16 billion yuan (+58.9%) and net profit of 400 million yuan (+80.5%) for the mother. The third quarter achieved revenue of 6.93 billion yuan (+82.04%) and net profit of 175 million yuan (+37.41%) for the mother in a single quarter.
The rapid growth in performance was mainly due to strong execution of external mergers and acquisitions. 1) The company achieved operating income of 16.16 billion yuan (+58.9%) and net profit of 4.1 billion yuan (+80.5%) in the first three quarters of 2017. The main reason was the acceleration of mergers and acquisitions in the context of the two-vote system. The number of unequal control cases that completed delivery in half of 2017 was 16 cases, consolidated revenue of 1.25 billion yuan in the first half of the year, and consolidated profit of 57.14 million yuan. Since the consolidation period of most targets occurred in May, we estimate that the relative contribution of extended mergers and acquisitions to the company's revenue and profit increased in the first three quarters. 2) The company's net interest rate increased by 0.72 percentage points in the first three quarters. Among them, gross margin increased by 0.39 percentage points, mainly benefiting from the increase in the equipment ratio; the sales expense ratio was reduced by 0.24 percentage points and the management expense ratio was reduced by 0.4 percentage points, showing a scale effect. 3) The third quarter achieved operating income of 6.93 billion yuan (+82.04%) and Guimo's net profit of 175 million yuan (+37.41%) in a single quarter. The reason the revenue growth rate was faster than Guimu's net profit growth rate was that some major mergers and acquisitions were not wholly owned mergers and acquisitions, and minority shareholders' income rose 17% from 2016Q3 to 30% in 2017 Q3.
The core business is pharmaceutical distribution, which is currently in the stage of rapid expansion. After divesting loss-making industrial assets in 2015-2016, the core asset was pharmaceutical circulation. The company currently covers the pharmaceutical commercial logistics network system of 11 provinces (cities) in China. The core area is Shandong, and other advantageous regions are Henan, Hubei, Xinjiang, Anhui, Shaanxi, Hunan and Heilongjiang. In 2016, 6 platform companies (provincial level) were set up, and business expansion was carried out on the basis of platform companies, which is expected to enhance the company's centralized procurement bargaining power, warehousing and logistics allocation efficiency, and comprehensive bidding competitiveness within the region. The expansion channel is mainly through external mergers and acquisitions. It is expected that there will be close to 30 merger projects in 2017, mainly in regions with traditional advantages such as Beijing, Hunan, Anhui, Shandong, and Heilongjiang. In the pharmaceutical distribution field, the company was the first company in the industry to implement GPO. Currently, Haiwang GPO is operating maturely in Shandong, and Anhui GPO is being promoted, and it is expected that GPO will seize greater market share through GPO.
Entering proton medicine is a scarce target for A-share high-precision medical equipment. The company partnered with Provision to advance proton therapy. Provision's Pronova uses patented superconducting technology to produce compact proton therapy devices. The product is being approved and registered with the FDA. Provision also has a comprehensive cancer diagnosis and treatment center, which has become one of the world's leading cancer treatment centers, providing a full range of solutions for cancer treatment. According to statistics from the 21st Century Economic Report, more than 40 hospitals in China have applied to build proton therapy centers. According to estimates of 1.5 billion yuan per package, that is, the domestic proton market space reaches 60 billion yuan. We think the company is expected to share the domestic market through joint ventures. The company is a scarce target for A-share high-precision proton therapy.
Profit forecasting and valuation. We expect the company's 2017-2019 EPS to be 0.24 yuan, 0.32 yuan, and 0.41 yuan respectively, and the corresponding PE will be 26 times, 20 times, and 16 times, respectively. The valuation is reasonable compared to comparable companies, covering the “increase in holdings” rating for the first time.
Risk warning: Outbound mergers and acquisitions fall short of expected risks, risk of impairment of goodwill.