Events:

The company reported on August 21 that the operating income in the first half of 2019 was 689 million yuan, down 29.83% from the same period last year; the net profit from returning to the mother was 63.0345 million yuan, down 5.80% from the same period last year; the net profit deducted from non-return was-23.2 million, down 147.75% from the same period last year; the net cash flow from operating activities was 143.36 million, down 56.79% from the same period last year; and basic earnings per share was 0.0716 yuan, down 5.79% from the same period last year.

Comments:

Affected by a number of pharmaceutical-related policies, elemene product name change and active marketing reform, 2019H1 revenue decreased by 30% compared with the same period last year.

1) under the influence of volume procurement policy and regional GPO volume procurement, the company's core products were forced to reduce prices or lose some regional markets. For example, in November 2018, Wuhan announced the candidate results of the first batch of public hospital drugs with volume procurement negotiations. The shortlisted regulations will start to implement the new purchase price with volume on December 1, and the trading of other unnegotiated products will be suspended. Among them, Shenxiong glucose injection is included in the list of auxiliary drugs in catalogue 2. Because our company can not accept the price reduction of more than 30%, it has lost all sales share in Wuhan market. 2) key drug monitoring catalogues and auxiliary drug catalogues have been drawn up one after another throughout the country, and the sales volume of the key drugs has been strictly restricted, which has a negative impact on the performance of enterprises. for example, in April 2019, Shijiazhuang issued the "implementation Plan for carrying out Special rectification of Auxiliary Drug use in the Medical Field" and announced 20 auxiliary drug products, including Shenxiong glucose injection. 3) the elemene product was originally called "Elemene injection". Due to the improvement of the process, the drug administration department changed its name to "Elemene Milk injection", which led to the re-filing of provincial medical insurance, and related to the re-filing of provincial health insurance, which had a great impact on the sales of the product in this process. At present, the change of medical insurance has been basically completed, and the sales business is in the process of gradual recovery. 4) in order to deal with the market, the company takes the initiative to carry out marketing reform, by strengthening professional academic promotion work, constantly promoting the coverage of marketing network, marketing channel sinking, and gradually realizing the transformation from agent control to self-control channel, in order to promote terminal quantity, the quantity of terminal products needs a certain period of time.

With the rapid growth of second-line varieties such as Children's Huichun, Haimen Huiju CDMO+ characteristic API is getting better and better:

The sales of second-tier varieties of 2019H1 company increased steadily, including children's Huichun granule by 18.03%, Xinnaoning capsule by 21.00%, oxaliplatin for injection by 21.76%, and irinotecan hydrochloride injection by 43.69%.

Haimen Huiju, a subsidiary of Haimen Huiju, has passed the cGMP on-site inspection certification of FDA in the United States, PMDA in Japan and MARA in China, and has established long-term partnerships with 10 domestic and foreign pharmaceutical companies, and more than 10 innovative drug projects in the late clinical stage or waiting for approval to be put on the market. In addition, several APIs with their own characteristics have been independently developed, of which 11 products have been declared and 2 drug approval numbers have been obtained in China; 17 have been declared in the United States, 5 in the European Union, and 3 have obtained CEP certificates; and more than 10 products are in the stage of R & D scale-up or preparation for declaration.

Profit forecast and valuation: based on the company's current business progress, we downgrade the company's profit forecast and estimate that the company's EPS for 19-21 years is 0.16 EPS 0.18 won, respectively, and the corresponding valuation is 26-23-19 times, maintaining a "highly recommended" rating.

Risk tips: preparation growth is not as expected; goodwill impairment risk; industry policy risk.