Incidents:

Hyundai Pharmaceutical released its 2018 semi-annual report. In the first half of 2018, the company achieved operating income of 5.853 billion yuan, an increase of 27.81% over the previous year; net profit attributable to shareholders of listed companies was 410 million yuan, an increase of 14.87% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 389 million yuan, an increase of 15.22% over the previous year, achieving EPS of 0.37 yuan.

2018Q2 achieved operating income of 2,744 million yuan, an increase of 24.02% over the previous year; net profit attributable to shareholders of listed companies was 237 million yuan, an increase of 19.90% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 221 million yuan, an increase of 10.20% over the previous year, achieving EPS of 0.21 yuan.

Opinions:

1. The overall performance of the interim report was in line with expectations. Most of the restructuring companies were doing well, and Wichida's performance exceeded expectations

The company's revenue for the first half of the year was 5.853 billion yuan, an increase of 27.81% over the previous year, and Guimu's net profit was 400 million yuan, a growth rate of 14.87%. The revenue growth rate exceeded expectations by more than 25%, and the business situation was gradually on the right track.

2017 was the first year after the company's restructuring. The company's results for the four quarters of 2017 were 159 million, 198 million, 89 million, 70 million, respectively. The base for the first and second quarters was too high, and the third and fourth quarters were heavily dragged down by subsidiaries and expenses. The company's performance in the first quarter of 2018 was 173 million, and the second quarter's performance was 237 million. Along with good operating cash flow, we judge that this is a positive sign that operations are gradually on the right track.

The reasons for the high growth rate of the company's revenue are as follows:

The pharmaceutical sector grew rapidly, and the first batch of cefuroxime was released rapidly after passing the consistency evaluation. Other key varieties, including nifedipine and methylprednisolone, all had obvious rapid growth. The first batch of the company's cefuroxime tablets passed the consistency evaluation, and a great deal of marketing work was done. The order conference on April 10 was led by conformance evaluation varieties, and a press conference was held, which led to the official launch of more than 800 product types.

The API division, Wichida, is operating normally, and 7ACA has a better price.

After the restructuring of the division, the overall layout of the company will continue to drive revenue side growth in the future: the company's marketing is divided into 5 major areas, and after classification, enterprises share sales channels. The five major divisions of daily internal management have the five vice presidents as specific leaders of the five sectors. Anti-infective, endocrine, cardiovascular, oncological, API, anesthetic components. Each sector has a leading enterprise, and leading companies bring subsidiaries to make the overall marketing layout of each sector. Similar (markets, varieties) are promoted collaboratively. The individual performance of each sector manager is linked to the overall performance of the sector.

Judging from the disclosure of major subsidiaries, the first half of 2018 was mixed

On the positive side: Haimen Zhonglian lost significantly; Wichida's business situation improved markedly, making a profit of 120 million in the first half of the year (having completed 60% of the annual performance commitment of 199 million); Hasson (oral formulations; Tianmasin, itraconazole) had a net profit of 309.766 million yuan, which also achieved rapid growth of close to 30%; Sinopharm Zhijun's growth rate was stable, with a net profit of 125 million yuan, meeting half of the performance promise; Pingshan Pharmaceutical's net profit was 3153.77, up more than half from last year (3.4337 million yuan), fulfilling its performance promise.

However, on the other hand, the performance of Sinopharm Rongsheng (a hormone-based freeze-dried powder injection) declined; Qinghai Pharmaceutical also had a certain gap between its performance promises; and Sinopharm's performance declined a lot.

Judging from the situation of restructurings and consolidated companies, the performance promises of the restructured company were fulfilled well in the first half of '18. With the exception of a 50% difference, all other subsidiaries met or exceeded expectations, with a combined performance of 239 million, and the overall completion rate was slightly less than 50%.

Overall, the original old Hyundai Pharmaceutical achieved steady growth of 13.2% in the first half of the year's performance of 171 million (compared to 151 million in the first half of last year).

In terms of financial indicators, the company's sales expense ratio was 26.11%. Compared with last year (11.14%), it grew faster than the revenue growth rate. There are some reasons for the low turnover and high opening. Furthermore, due to the accelerated growth rate of the pharmaceutical sector, the company increased product promotion efforts, and terminal channel expenses increased; the management expense ratio was 8.22%, down 1.07pp from 9.29% for the whole of last year. The company's cost reduction and efficiency effects are still reflected. The company's financial expenses are basically stable, with a comprehensive gross profit margin of 48.72%. Compared with 38.51% last year, there is a significant increase. There is an impact of the two-vote system, but it is mainly due to the rapid growth of the pharmaceutical sector that drives the company's overall gross profit margin, and the company's gross margin is expected to continue to rise in the future.

2. Looking ahead to 2018, focus on the consistency evaluation of the pharmaceutical sector and the release of new medical insurance varieties and subsequent changes in the API sector

2017 was the first year after the company was restructured, and the pressure was severe due to the influence of APIs and the restructuring company's failure to meet performance promises. However, in the long run, the company is positioned as a platform for the Sinopharm industry. The company has many high-quality varieties, new medical insurance varieties, and consistency evaluation varieties, and there is huge room for future improvement. At the same time, the API sector fell seriously short of expectations in 2017. Continued attention should be paid to the production and operation of the company's API sector in the future.

The company's future growth logic is as follows:

In terms of consistency evaluation: By the end of the reporting period, 76 compliance evaluations had been carried out (of which 37 were in the “289 catalogue” and 39 were not in the “289 catalogue”), involving 25 large varieties and 16 potential varieties. Following cefuroxime tablets (0.25g), Sinopharm also passed the consistency evaluation of generic drug quality and efficacy, opening up a new situation for market sales and competition for this variety.

The launch of new production capacity further strengthens the position of a “chemical platform”: the project investment amount is 1.45 billion, with a production capacity of 5.5 billion tablets/tablets/bags/bottles. It is expected to contribute close to 3 billion dollars in revenue in the future, providing a guarantee for continued growth.

Sorting out and integrating existing varieties: After the restructuring is completed, the company has 21 products worth over 100 million yuan. Through resource integration, future resources will be allocated more efficiently, the disorderly product layout scattered across various factories will be rationally planned and integrated, and Hyundai Pharmaceuticals' position in the first-level echelon in key areas will be more stable.

Flexibility of the medical insurance catalogue: The company and its subsidiaries include a number of new products in the medical insurance catalogue. New products that have entered the medical insurance catalogue will have a positive impact on the company. In particular, exclusive products such as dextromethorphan sustained-release suspension, minalapron tablets, and golden leaf detoxification particles are expected to be released in the future and make a positive contribution to the company's profits.

APIs: Haimen is expected to reverse losses. 6-APA, 7-ACA, and penicillin industrial salt ingredients contribute flexibility.

In terms of outreach: As a chemical drug platform, the company's outreach expectations are still strong.

Conclusions:

We expect that after the restructuring is completed, the company's operating efficiency as Sinopharm's chemical platform will continue to improve. Net profit attributable to the mother in 2018-2020 is estimated to be 713 million yuan, 886 million yuan, and 1,050 million yuan respectively. The corresponding growth rates are 38.24%, 24.24%, and 18.47% respectively. EPS is 0.68 yuan, 0.84 yuan, and 0.99 yuan respectively, and the corresponding PE is 15X, 12X, and 11X respectively. Maintain a “Highly Recommended” rating.

Risk warning:

The restructuring and integration fell short of expectations, and injections and antibiotics were limited