2018 1H results are in line with expectations

Kehua Biotech announced 2018 1H results: operating income of 974 million yuan, up 29.74% year on year; net profit attributable to parent company was 137 million yuan, up 8.50% year on year, corresponding to earnings of 0.27 yuan per share. It met our expectations.

Development trends

Competition in traditional businesses has intensified, and new business is gradually expanding: Currently, the company is facing increased competition in traditional businesses such as biochemistry and enzyme exemption. The growth rate of the company's self-produced products business has slowed, and revenue growth in the first half of the year was 4%. We believe that the company's core growth points in the future are POCT, chemiluminescence, and blood screening. At present, the company's chemiluminescence instruments have begun terminal promotion, and TGS series products are also expected to be gradually marketed. Chemiluminescence is expected to become a growth point in the next few years. At the same time, the company began to penetrate channels, gradually develop packaging and collection business, and increase its market share.

Export business is expected to gradually resume: the company's products officially passed the WHO in vitro diagnostic product qualification review in January 2017 and were included in the World Health Organization procurement list. Export sales were re-achieved in the second quarter and will continue to recover in the second half of the year.

Continuing to advance the international strategy: During the reporting period, the company merged and acquired shares in Suzhou Changguang Hua Medical, Xi'an Tianlong, and Suzhou Tianlong to further enrich the company's product line in the field of chemiluminescence and nucleic acid diagnosis, laying the foundation for subsequent development.

Profit forecasting

As traditional businesses face increased competition, we lowered the company's 2018 EPS forecast by 11% to 0.46 yuan, and introduced the 2019 EPS forecast of 0.50 yuan. In 2018/2019, we forecast EPS growth of 7.8% and 10.6%, respectively.

Valuation and advice

Currently, the company's stock price corresponds to 2018/2019 P/E 24X/22X, respectively. Due to the slowdown in traditional business growth, we lowered our target price by 30% to 14 yuan, which has room for an increase of 26% from the current stock price. The target price corresponding to the 2018/2019 P/E is 30X/28X respectively. Maintain recommended ratings.

risks

The risk of a decline in traditional business, and the risk of mergers and acquisitions falling short of expectations.