Key points of investment
Performance summary: The company achieved operating income of 1.08 billion yuan in 2017, an increase of 25.5% over the previous year; achieved net profit of 200 million yuan, an increase of 61.4% over the previous year; achieved net profit of 190 million yuan after deduction, an increase of 64.4% over the previous year; and EPS was 0.38 yuan. At the same time, the company released its 2018 quarterly report, which achieved operating income of 320 million yuan, an increase of 29.5% over the previous year; achieved net profit of 65.49 million yuan, an increase of 40.0% over the previous year; and achieved net profit of 64.97 million yuan after deducting non-return mother's net profit of 64.97 million yuan, an increase of 38.9% over the previous year. It is forecast that the 2018 interim report returns to the mother's net profit of 127-142 million yuan, an increase of 25%-40% over the previous year.
The parent company's performance recovered, and CRO performance continued to grow rapidly. The company achieved revenue growth rates of 25.5% and 61.4% in 2017, respectively, and revenue in Q1 2018 and net profit growth rates of 29.5% and 40.0% respectively. By business: 1) Pharmaceutical business: Revenue was 430 million yuan, 14.5% year on year. Among them, revenue from the antibiotic and non-antibiotic formulation business was 190 million yuan and 240 million yuan respectively, with year-on-year growth rates of 1.3% and 27.9% respectively; 2) CRO business: revenue of 620 million yuan, a year-on-year growth rate of 34.6%. Of these, 430 million yuan was pre-clinical and 190 million yuan was clinical. Looking at subsidiaries, the CRO subsidiary Xinyuan contributed 150 million yuan in net profit, the impact of the parent company's financial expenses was reduced, and the non-CRO business is expected to contribute around 50 million yuan in total profit.
Under the national strategy to encourage innovation, the CRO business will continue to grow rapidly. The CRO industry is at the core of the pharmaceutical R&D industry chain and is indispensable for new drug development. Benefiting from the successive introduction of relevant national policies to encourage innovation and development in the pharmaceutical industry, the CRO industry has developed rapidly. The subsidiary Shanghai Xinguofeng innovatively developed a GRDP management system with a highly qualified and specialized management and operation team, and has accumulated a large number of channels and R&D resources such as the top three hospitals, clinical experts, technology platforms, pharmaceutical companies, medical institutions, research institutes, etc., and the service capacity of the CRO business chain will continue to grow rapidly in 2018. It is likely that it will continue to exceed performance promises in 2018.
Industry and capital are driven by two wheels to actively build a health industry ecosystem. The company actively uses the favorable platform of the capital market and adheres to the development strategy of endogenous expansion and outbound mergers and acquisitions based on existing business. On the one hand, it actively promotes the construction of the “Modern Pharmaceutical Formulation Phase I and Phase II Project” and the “Wuhan Optics Valley Biotechnology City Pharmaceutical Park New Drug R&D Service Platform Construction Project” in Binhai New Town in Shaoxing as planned; on the other hand, it is actively seeking M&A targets in line with the company's development strategy to build a health industry ecosystem. Currently, the company and Dongfang Hongtai Capital have formed a joint acquisition consortium to carry out the target assets Preparation before bidding.
Profit forecasts and investment recommendations. The 2018-2020 EPS is expected to be 0.50 yuan, 0.64 yuan, and 0.82 yuan respectively. The net profit returned to the mother will maintain a compound growth rate of 29.7% over the next three years, corresponding to the current stock price PE of 38 times, 29 times and 23 times, respectively. Considering the broad prospects of the CRO business and the company's long-term development expectations, we believe that the company's performance and valuation are expected to improve simultaneously and maintain the “buy” rating.
Risk warning: CRO business expansion falls short of expectations, risk of drug or storage price reduction, and extension may fall short of expectations.
