It covers the buy rating for the first time, with a target price of HK $13.0. We believe that Shenwei is currently at an inflection point in business operation. In terms of traditional Chinese medicine injection, we expect to benefit from the integration of the whole industry, Shenwei will further expand its market share. In terms of soft capsules and granule products, due to the inclusion of the company's exclusive products in the new health insurance, a strong brand image and the restructuring of the sales team, the growth rate of these two businesses is expected in the future. In addition, we expect that the traditional Chinese medicine formula granule business will gain greater growth potential from market expansion in the future. Overall, we believe that the company's worst-case scenario is over and 2018 should be a turning point for Shenwei's performance. We cover the company for the first time and give a buy rating with a target price of HK $13.0, which is derived from the discounted cash flow model (WACC:12.8%, final growth rate: 2.0%).
Benefit from the integration of traditional Chinese medicine injection industry. The restriction policy and regulation of traditional Chinese medicine injection have triggered a new round of integration in the industry. Shenwei, as a leading traditional Chinese medicine injection manufacturer with large scale, effective product verification and strong brand image, is expected to benefit from industry integration and expand market share in the future. Although we expect the growth of the traditional Chinese medicine injection industry to stagnate in the future, Shenwei is likely to achieve high single-digit growth in this round of market integration.
Exclusive health insurance products add growth momentum. Shenwei's two exclusive products Qingkailing soft capsules and synovitis granules have been included in the latest national health insurance catalogue. Considering Shenwei's strong brand image and the reorganization of the sales team, we believe that in 2018 / 2019, the company's soft capsules will record 13.8% / 13.8% growth, and granule products will achieve 16.4% / 16.2% revenue growth.
The granule of traditional Chinese medicine formula has great expansion potential. Shenwei has been selling traditional Chinese medicine formula granules in Hebei Province since 2014.
With the gradual opening up of the traditional Chinese medicine formula granule market, we believe that Shenwei may expand its distribution network to more provinces in the future. Taking into account the autogenic growth rate in the industry and the further expansion in Hebei Province, we believe that the company's income from traditional Chinese medicine formula particles will increase by 85.2% / 60.0% respectively in 2018 / 2019, which will become the main driving force of the company's performance growth.
Core net profit is expected to increase by 29.0% / 19.9% in 2018 / 2019. We expect revenue to grow by 16.2% / 16.8% respectively in 2018 / 2019. As operating margins improve and tax rates return to normal levels, we expect the core net interest rate to rise to 24.1% / 24.7% in 2018 / 19. As a result, core net profit is expected to increase by 29.0% / 19.8% to 523 million / 627 million RMB respectively in 2018 / 19.
Main points of investment
Performance is back on track
First coverage, with a buy rating, with a target price of HK $13.0
Although the performance of Shenwei Pharmaceutical has been very low in the past few years, we believe that Shenwei is at an inflection point.
In terms of traditional Chinese medicine injection, we expect to benefit from the integration of the whole industry, Shenwei will further expand its market share. In terms of soft capsules and granule products, due to the inclusion of the company's exclusive products in the new health insurance, a strong brand image and the restructuring of the sales team, the growth rate of these two businesses is expected in the future. In addition, we expect that the traditional Chinese medicine formula granule business will gain greater growth potential from market expansion in the future. Overall, we believe that the company's worst-case scenario is over and 2018 should be a turning point for Shenwei's performance. We covered the company for the first time and gave a buy rating with a target price of HK $13.0, which was derived from the discounted cash flow model (WACC:12.8%, final value growth rate of 2.0%).
Integration of traditional Chinese medicine injection industry benefits leading enterprises
We believe that the Government intends to adjust but cannot eliminate the Chinese medicine injection industry. In the new round of national health insurance catalogue, although more than 80% of traditional Chinese medicine injections have use restrictions, only one traditional Chinese medicine injection has been transferred from the latest national health insurance catalogue. These restrictions will guide hospitals to make more rational use of traditional Chinese medicine injections. In addition, the government will actively promote the reevaluation of the efficacy of injection products. We believe that these measures will promote the integration of the traditional Chinese medicine injection industry. The leading traditional Chinese medicine injection manufacturers with proven products and good quality will survive in the long-term integration of the industry. We believe that leading enterprises like Shenwei will benefit from industry consolidation. Therefore, we expect the company's traditional Chinese medicine injection business to grow by 8.7% / 9.7% respectively in 2018 / 19.
Exclusive national health insurance catalogue products add growth momentum
Shenwei's two exclusive products Qingkailing soft capsules and synovitis granules have been included in the latest national health insurance catalogue.
Considering Shenwei's strong brand image and the reorganization of the sales team, we believe that in 2018 / 2019, the company's soft capsules will record 13.8% / 13.8% growth, and granule products will achieve 16.4% / 16.2% revenue growth.
The granule of traditional Chinese medicine formula has great expansion potential.
Shenwei has been selling traditional Chinese medicine formula granules in Hebei Province since 2014, and currently produces more than 600 kinds of formula granules, and its products have been listed in the Hebei Provincial Health Insurance catalogue. Shenwei has installed 120 dispensing machines in more than 100 traditional Chinese medicine hospitals in the province. Most of the income from formula granules comes from these hospitals. It is expected that with the gradual opening up of the traditional Chinese medicine formula granule market, we believe that Shenwei has the potential to expand its distribution network to more provinces. Considering the self-growth rate in the industry and the further expansion in Hebei Province, we believe that the traditional Chinese medicine formula granule business will become the main growth force of the company, and the revenue is expected to grow by 85.2% / 60.0% respectively in 2018 / 19.
Improved operating efficiency and improved operating profit margin
As a result of poor sales performance, the company's operating profit margin fell from 31.9% in 2015 to 23.2% in 2017, from 29.5% to 23.2% in 2017. However, with the implementation of internal cost control, the restructuring of the sales team and the recovery of revenue growth, we expect operating margins to improve in the next few years, reaching 24.8% / 26.0% respectively in 2018 / 19.
Core net profit is expected to grow by 29.0% / 19.9% respectively in 2018 / 19. We expect total revenue to grow by 16.2% / 16.8% respectively in 2018 / 19. As operating margins improve and tax rates return to normal levels, we expect the core net interest rate to increase to 24.1% / 24.7% in 2018. As a result, core net profit is expected to increase by 29.0% / 19.8% to 523 million / 627 million RMB respectively in 2018 / 19.
Investment risk
(1) the government further restricts the use of traditional Chinese medicine injections, (2) major adverse reactions, (3) a substantial increase in the cost of raw materials, (4) bidding for major products to reduce prices, (5) the expansion rate of traditional Chinese medicine formula particles is lower than expected.