We visited the company's customers, suppliers, competitors, etc., and comprehensively combed the company's existing business (IVD integrated supply) and the two new businesses of SPD and regional inspection center newly developed in recent years. We believe that the changes in the company's fundamentals, especially the progress of SPD's new business and the flexibility of the company's performance, have not been fully recognized by the market. The market's lack of attention and divergence for the company is mainly reflected in the following aspects:
1. Fundamentals.
Room for growth: the market only regards the company as an IVD distributor, and the competition in this market has become fierce. the company either slows down its growth or takes acquisitions to enter a new hospital, which will consume a lot of cash and form goodwill. The company's business model determines its growth speed and growth quality.
SPD model: the company needs to enter the hospital supply system through the dealer relationship, high-quality dealers play an important role in taking down the hospital, such dealers may not be willing to cooperate with the company, even if the cooperation can lead to the loss of the company's business volume. In addition, the development of dealers takes time, the company has no advantage in distributing low-value consumables and high-value consumables outside IVD, and it is doubtful whether the service can be recognized by the hospital. At the same time, this model harms the interests of existing dealers, and the SPD business of Shanghai Pharmaceutical has not been expanded, so this model does not have a fast replication basis, and it is difficult to become the mainstream model in the future.
Cash flow: circulation companies are squeezed by medical institutions and production enterprises, so they need to advance capital because of the unequal account period, so the company's cash flow is poor, and it is worrying to operate in the environment of difficult financing and high interest rates.
Valuation.
The current valuation of the company is at a historically low level, but the valuation in the industry is lower than that of Runda Medical and Ruikang Pharmaceuticals. The market thinks that the cash flow difference of circulation enterprises means that the industrial position is disadvantageous, and the undervaluation of the company is reasonable.
Through the analysis of industry policy and company competitiveness, the relationship between upstream and downstream, the main points are as follows:
1. The company can strike a balance between growth speed and quality. Through the SPD model, the company expands its business scope from the past IVD to include IVD, low-value consumables, high-value consumables and other medical consumables. It has entered a new blue ocean market and has not only engaged in in vitro diagnosis distribution. The size of the market is more than 500 billion, which is several times that of IVD, and the space is vast. At present, the competition in the SPD market is not fierce, and the company has a significant first-mover advantage, so it is expected to be the first to get the secondary port of the super hospital, thus sustained and relatively rapid growth. In addition, no matter it is the collection or IVD business, the company signs an agreement with the hospital directly rather than through the acquisition of dealers to rapidly expand the business, so the company does not have a large amount of investment cash flow, nor does it form a large goodwill, and the growth quality is higher.
2. SPD accords with the fundamental demand of the hospital and conforms to the general trend of medical reform. It will become the mainstream supply mode of consumables in future hospitals (including some super hospitals with income above 4 billion). Consumables management has always been the pain point of hospital management, the only way out is to find professional and reliable third-party operation, full consumables SPD business arises at the historic moment. SPD business process is standardized, easy to copy, in line with the interests of many parties, and is expected to become the mainstream mode of hospital consumables management in the future. Selis began to explore the SPD business from the shareholding company in 2016, with significant first-mover advantages. The company explored a series of management models, supporting software and hardware, actively seizing the entrance to the super hospital, and revenue has increased significantly since 19 years.
3. With the rapid increase of the proportion of SPD business income, the cash flow of this model is better than that of collection business, the proportion of operating cash flow relative to company income is greatly reduced, and the cash flow situation has been significantly improved.
4. The company is not just an IVD distributor in the traditional sense. In the future, the valuation of the company will be improved with the improvement of the company's business structure, performance growth and cash flow.
Investment advice: buy-An investment rating, 6-month target price of 21.12 yuan. The company's net profit from 2018 to 2020 is expected to be 1.23,1.97 and 313 million yuan respectively, with growth rates of 31%, 61% and 59% respectively, and the current stock price valuation is 26X, 16X and 10X respectively. Given a clear business model and outstanding growth, the six-month target price is 21.12 yuan, equivalent to a dynamic price-to-earnings ratio of 22 times 2019.
Risk hint: new business expansion is not as expected, the reduction of consumables prices led to a decline in the company's net profit level, cash flow did not improve as scheduled.