Summary of the report:
Event: when the company released its 2019 semi-annual report, 2019H1 achieved an operating income of 2.452 billion yuan, an increase of 8.25% over the same period last year, a net profit of 324 million yuan belonging to shareholders of listed companies, an increase of 32.48% over the same period last year, and a net profit of 316 million yuan after deducting non-recurring gains and losses belonging to shareholders of listed companies, an increase of 30.09% over the same period last year. The net cash flow generated by operating activities was 249 million yuan, an increase of 39.55% over the same period last year.
Comments:
The performance of the China report is in line with expectations, and the trend of improvement continues. During the reporting period, the company's operating income grew steadily and its gross profit margin increased slightly (+ 0.1pct). The net profit of returning home has increased rapidly and maintained a positive trend. The rapid growth of return net profit in the current period is mainly caused by the decrease of sales expenses, financial expenses and other expenses during the period. Among them, benefiting from the decline in sales services and promotion fees (- 49.79%), the company's sales expenses decreased by 7.84% year on year during the reporting period, and the sales expense rate decreased by 2.95pct. In addition, the company's structural deposits increased by 121 million yuan (+ 6.90%), resulting in an increase in interest income, which in turn led to a decline in financial expenses (- 61.33%). During the reporting period, the net growth rate of operating cash was relatively high, mainly due to the increase in sales rebates and the recovery of loans compared with the same period last year.
Focus on creating its own varieties, first-tier star OTC has grown steadily. The company has now formed a strong star brand cluster. The company's first-line products include cold cough products "Renhe Klick" and "Yucadan series", gynecological care products "Fuyanjie series", eye care products "shiny eye drops" and so on, which are all well-known brands in similar products. After years of operation, it has established a stable brand value and has a strong competitive advantage in similar products. In recent years, relying on the company's focus on building its own gold products and improving its profitability, its own brand has maintained steady growth. This logic is also reflected in the 2019 mid-term report. The combined revenue of Jiangxi Pharmaceutical, Zhangshu Pharmaceutical, Kangmei, Yodu Renhe and Tonggu Renhe, the five major production subsidiaries of 2019H1, increased by 13.91% year-on-year, while net profit increased by 25.47%. In the future, with the further strengthening of the company's own brand marketing, the core products are expected to maintain stable growth.
Relying on the OEM contract manufacturing model, the second-tier brands grow rapidly. While maintaining the steady growth of first-tier brands, the company is also actively grafting OEM to expand its product group to create another booster for the company's growth. In the OEM model, the company forms an alliance with pharmaceutical companies to produce products and label the "Renhe" trademark. In this way, on the one hand, the company can rapidly increase the category of second-line products, expand the output port of terminal products, and realize the brand value of "Renhe"; on the other hand, relying on its own channel advantages, the company can realize the effective volume of introducing varieties. In recent years, the second-line products, including many OEM varieties, have grown rapidly, among which the Miaka series and Ke Kuaihao series have been sold in Chinese medicine subsidiaries. Chinese medicine has maintained rapid growth in recent years, and the growth rate of 2019H1 net profit is 37.63%, which is further higher than that of 2018H1 net profit growth (22.14%). We believe that with the addition of more cooperative OEM manufacturers and the expansion of second-line varieties, the company's performance is expected to be continuously promoted.
Profit forecast and investment rating: the company's performance is improving, and the first-tier OTC products are expected to maintain steady growth. With the help of the rapid growth of its second-tier OEM products, the positive trend is expected to be maintained. We expect the company to achieve revenue of 50.69,58.94 and 6.829 billion in 2019, 2020 and 2021, and its net profit is expected to reach 6.44,7.94 and 961 million respectively, with an EPS of 0.52,0.64 and 0.78 yuan respectively. For the first time, coverage gives a "recommended" rating.
Risk Tip: product sales are not up to expectations.