With the steady growth of performance over the past decade, the company in the field of health has expanded from the most basic core business of cephalosporins, APIs and intermediates, and has initially completed the layout of drug R & D and manufacturing, biomedicine, medical devices, Internet and medical services. From 2008 to 2017, the company's operating income grew at a compound rate of 18.81%, and its performance maintained steady growth. Recently, the company announced that operating revenue is expected to grow by 80% in the first half of 2018. Net profit increased by 30% compared with the same period last year. 60%. In May 2018, the company plans to buy a 100% stake in Qili Pharmaceuticals with 2.142 billion yuan in cash. Qili Pharmaceuticals focuses on R & D and production of antibiotics, cardiovascular drugs and digestive system drugs, with revenue and net profit of 1.201 billion yuan and 105 million yuan respectively in 2017.

Basic business continues to grow, with abundant cash flow supporting layout

At present, the company's main business is the company's core drugs and APIs, medical devices and medical services provided by mergers and acquisitions hospitals. The comprehensive gross profit margin of the main business has increased in the past two years, with a gross profit margin of 48.1% in 2017. Income from medical services increased significantly, accounting for 6.7% of the total revenue in 2017. The company's outbound investment has expanded rapidly since 2015, resulting in a large investment cash outflow. In order to ensure the stability of cash flow, the company raised funds through non-public issuance of shares and non-public targeted debt financing instruments. In 2016, the company raised 3 billion yuan in non-public shares and 500 million yuan in non-targeted debt financing instruments. 500 million yuan in medium-term bills. At present, the company has abundant cash flow, which supports the expansion layout of the company.

Innovative drugs for deep layout, future products are worth looking forward to

China Antibody, a holding subsidiary, has been developed and patented by a team of experts headed by Dr. Liang Ruian in Europe and the United States. at present, clinical research approvals for the treatment of non-Hodgkin's lymphoma, systemic lupus erythematosus and rheumatoid arthritis have been obtained in China. The MDM2 inhibitor of spiropyrrolidine, a broad-spectrum and targeted anti-tumor drug independently developed by subsidiary Hudson of the United States, led by Dr. Ding Qingjie, has been granted patents in the United States, China, Europe, Canada, Japan and Australia, and is carrying out preclinical research in China and the United States at the same time. Hainan Haiyou, co-funded with Shanghai Youkadi, is committed to the in-depth research and development of CAR-T technology in the field of gene-cellular immunotherapy oncology.

Valuation and rating

Through the merger and acquisition of Qili Pharmaceutical, the company carries out unified planning of sales line management to achieve the coordination of product layout and business development. The company's second-generation cochlear implant and Internet medical care have gradually entered the harvest period. Excluding the acquisition of Qili Pharmaceutical, we estimate that the company's EPS from 2018 to 2020 will be 0.17,0.29,0.35 yuan respectively. With reference to companies in the same industry, Heng Rui Pharmaceutical is rich in product reserves and has a large market space for innovative drugs. considering the company's long-term layout in the field of innovative drugs, a number of products have entered the clinical research and development stage, which is comparable with Heng Rui's valuation, so it gives the company 50 times PE in 2019, with a target price of 14.50 yuan, covering for the first time the rating of "increasing holdings". If taking into account the merger and acquisition of Qili Pharmaceutical Co., Ltd., the preparation EPS is 0.35,0.48 and 0.58 yuan respectively, corresponding to about 30 times the PE in 2019.

Risk tips: 1. Qili Pharmaceutical acquisition failure risk; 2. Qili Pharmaceutical has no performance commitment, there is a risk that the performance is lower than expected; 3. Research and development expenses are a drag on the company's profits; 4. Product bidding and price reduction pressure; 5. The recent administrative penalty may have an impact on the company's future financing; 6. There is a risk of imperfect internal control.