Performance summary: 2018H1 realized income of 1.58 billion (+ 24%), net profit of 120 million (+ 284%), net profit of 110 million (+ 31%); 2018Q2 realized income of 700 million (+ 9%), net profit of 32.3 million (+ 71%), and net profit of 30.25 million (+ 116%) in a single quarter.
The performance continued to grow at a high level, and the price increase of veterinary drugs increased the performance. Overall, the company's performance has maintained a momentum of rapid growth.
From the perspective of molecular companies, Lukangsherile, a wholly-owned subsidiary of veterinary drugs, achieved an income of 490 million (+ 42%) and a net profit of 27 million (+ 130%), mainly due to the increase in revenue and profitability caused by the rise in the price of tylosin series of veterinary drugs. Lukang Biological Manufacturing, a wholly-owned subsidiary of human and veterinary APIs, achieved an income of 280 million (+ 81%) and a net profit of 62 million (substantially turning losses into profits), which is estimated to be due to the increase in the price of veterinary drugs and the improvement of production efficiency of APIs for human use. Lukangsett, a holding subsidiary dominated by human preparations, achieved an income of 140 million (+ 41%) and a net profit of 18.07 million (+ 42%). The combined net profit of the three subsidiaries is close to 100 million, which is the main source of the company's performance growth. The increase in the price of veterinary drugs and the improvement in the production efficiency of human preparations have led to a substantial reduction in costs.
Environmental inspections have pushed up the price of core veterinary APIs, and Teri's relocation has led to a serious shortage of tylosin series.
The main domestic suppliers of tylosin series of APIs include Ningxia Terui, Lu Kang Medicine and Qilu Pharmaceutical, with a total market share of more than 90%. The annual demand for tylosin is about 6000 tons, of which Tylosin accounts for more than 63%. Teri production process due to the "smell disturbing people" problem has not been solved, in June issued a public statement that it intends to move, and then due to the resumption of production without authorization, Ningxia Teri and the head of the company were investigated by the government in August. Due to Teri's suspension of production and relocation, the annual supply of tylosin APIs has dropped from the original 8000 tons to about 3500 tons, and Teri has been relocated for a long time. It is estimated that tylosin will be seriously in short supply in the next two years. The quotation of tylosin rose from 318 yuan in early June to 390 yuan recently, while the derivative tilmicosin rose from 456 yuan to about 513 yuan, up 23% and 13% respectively. In an environment where supply exceeds demand, prices are likely to continue to rise.
The operating efficiency continues to improve and the performance is greatly improved. Since 2015, the company has made great efforts to promote internal resource integration and product restructuring. On the production side, improve the process level and production efficiency, implement sunshine procurement to reduce material procurement costs, significantly reduce production costs, and continue to improve the comprehensive gross profit margin. At the sales end, strengthen the development of strategic varieties, Tylosin and other veterinary drugs actively open up major customers, antibiotic preparations to the international market, the product structure has been significantly improved. We will reverse losses in 2015, maintain rapid growth in net profit in 16-17, and maintain rapid growth in new capacity plus price increases in 18 years.
Profit forecast and investment advice. It is estimated that the EPS from 2018 to 2020 will be 0.47,0.58,0.73 yuan respectively, corresponding to 28 times, 22 times and 18 times of PE, respectively, maintaining the "buy" rating.
Risk tips: the risk of price reduction of veterinary drug products; the risk of capacity release progress or lower than expected risk.