The company's performance preview predicts a 35%-40% year-on-year decline in net profit, lower than our expectations
Tong Ren Tang Technology released a performance preview: Net profit fell 35%-40% to RMB 441 million - 407 million yuan in 2019, lower than expected. The decline in net profit is mainly due to the company as a whole facing problems of insufficient production capacity and declining output value.
Key points of interest
For the fourth quarter of 2019, we expect a net profit loss of RMB 38 million - RMB 72 million (vs. net profit of RMB 125 million for the fourth quarter of 2018 alone). We believe that the company's own manufacturing business was under pressure in 2019, mainly due to the fact that the relocation schedule of the new plant fell short of our expectations, and there was a bottleneck in the production capacity of existing core products, so the company's main products were under pressure to decline in revenue in 2019.
We expect core product revenue to gradually improve as early as the second half of this year. Currently, production capacity for some dosage forms of the core varieties Liuwei Dihuang Pills, Xihuang Pills, and Jinqui Kidney Qi Pills has been gradually transferred to the Daxing base (mainly production of pills such as water syrup pills and daimitsu pills). We expect the company's Ejiao product industry inventory to return to normal as soon as the first half of this year.
Due to rising raw material prices, the retail price of Angong Niuhuang pills rose to RMB 780 per pill. On December 24, 2019, Tongrentang Group announced an increase in the retail price of its core product “Angong Niuhuang Pills” (double natural specification). Prices will be implemented immediately after the announcement. The retail price in mainland China rose from RMB 560 per pill to RMB 780 per pill (this time the price increase was 39%. Previously, the company raised the retail price from RMB 350 per pill to RMB 560 per pill in 2012). We believe that price increases are beneficial to stabilizing gross margin.
Valuation and advice
Considering the impact of production capacity bottlenecks on the company's performance, we lowered our earnings per share forecast for 2019 and 2020 by 34.7%/35.0% to RMB 0.33 and RMB 0.35, and introduced the 2021 earnings per share forecast of RMB 0.37, corresponding to a year-on-year decline of 37.1% and an increase of 3.8%/7.3%, respectively. The current stock price corresponds to 2020/21 18.0/16.7 times P/E. We maintain our neutral rating, but considering the downward shift in the industry valuation center, we lowered our target price by 5.9% to HK$8.0 (19.7/18.6 times 2020/21 P/E, 11.1% upward space).
risks
Depreciation pressure at the Daxing and Tamada bases.