Incidents:

The company released its 2018 mid-year report. The company's revenue for the first half of the year was 17.551 million, up 90.32% year on year, net profit was 327 million yuan, up 38.66% year on year, net profit after deduction was 290 million yuan, up 21.89% year on year; Eps was 0.12 yuan, up 38.76% over the same period last year.

Comment:

Continued promotion of mergers and acquisitions of pharmaceutical distribution channels, and the company's revenue and performance grew rapidly

The company's revenue in 2018H1 was 17.551 billion, an increase of 90.32% over the previous year, and net profit of 327 million yuan, an increase of 38.66% over the previous year. Among them, the revenue of the pharmaceutical business sector was 17.05 billion yuan, an increase of 92.03% over the previous year. Mainly benefiting from the context of the two-ticket system policy, the company followed industry trends and accelerated the integration and acquisition of pharmaceutical distribution channel providers. In 2018 H1, 29 channel providers were merged and acquired, and pharmaceutical commercial business systems in more than 20 provinces have been established.

The revenue and account scale of the distribution channel business expanded, market capital was tight, interest rates rose, and the financial expenses of the 2018H1 company reached 300 million, an increase of 223.67% over the previous year. As a result, the company's performance growth rate was lower than the revenue growth rate. The company's operating cash flow improved in a single quarter in the second quarter

The company's accounts receivable in mid-2018 were 16.9 billion yuan, accounting for 47.86% of total assets, an increase of 4.87 pp over the same period last year. Huge revenue accounts dragged down the company's cash flow, causing the company's financial expenses to reach 300 million yuan in the first half of the year, an increase of 223.61% over the previous year, which greatly dragged down the company's performance. The company actively expanded and optimized financing channels. In the first half of 2018, the company set up the “Haiwang Biotech Phase 1 Accounts Receivable Debt Asset Support Special Plan” to raise 987 million yuan; issued the first phase of private corporate bonds to raise 800 million dollars. It is actively preparing for the 2018 annual allotment of shares to raise funds, optimize the company's capital structure, and reduce the balance ratio to promote the company's long-term rapid development. The company's net operating cash flow in Q2 2018 was +108 million, an improvement over the first quarter (-1,058 million), and the company's cash flow situation is expected to continue to improve.

Research and development work achieved milestones; collaborated with international medical institution Provision Healthcare to set up a cancer proton therapy center

The company's pharmaceutical research and development is being carried out in an orderly manner. In terms of new drugs, the clinical study application for the development of the new anti-tumor drug “naprotinib xylenesulfonate tablets” was approved by the US FDA, and the US phase I clinical trial was initiated; in terms of generic drugs, the company carried out a total of 5 project consistency evaluation studies and completed 2 pre-bioequivalence studies for 2 projects.

The company took a stake in Provision Healthcare, LLC in the US in 2016; and jointly established a Chinese joint venture with Provision Healthcare Medical Group, Shenzhen Sino-US Haihui Healthcare exclusively operates Provision Healthcare proton therapy systems in China. Currently, it has signed strategic cooperation agreements with many domestic cancer hospitals and the top three comprehensive hospitals, and will establish and operate proton therapy centers in China.

Profit forecasting and valuation

According to the company's current business situation, we assume that the company's M&A business continued to grow rapidly in 2018 and began to slow down in 2018. We estimate that the company's EPS in 18-20 was 0.31/0.39/0.47 yuan respectively, and the corresponding valuation was 13/10/8 times respectively, maintaining the “highly recommended” rating.

Risk warning: risk of impairment of goodwill; risk of industry policy.