Key points of investment
Matters:
The company announced its 2019 annual report, achieving revenue of 1,675 million yuan, an increase of 26.75% over the previous year; achieving net profit of 263 million yuan, an increase of 18.62% over the previous year; achieving net profit of 195 million yuan after deduction, an increase of 80.26% over the previous year; and EPS of 0.21 yuan/share. The company's performance was in line with expectations.
The 2019 profit distribution plan is 2.5 yuan (tax included) for every 10 shares.
At the same time, the company released its report for the first quarter of 2020, achieving revenue of 146 million yuan, a year-on-year decrease of 60.22%; realized net profit of 25.35 million yuan, a year-on-year decrease of 128.37%; and achieved net profit of 31.31 million yuan after deduction, a decrease of 153.15% over the previous year.
Ping An's point of view:
The company's main business performed well in 2019, and 2020Q1 was hit hard by the COVID-19 pandemic: in 2019, the company achieved revenue of 1,675 million yuan (+26.75%), and the net profit of the mother was 263 million yuan (+18.62%), in line with previous expectations. If you add back about 3,800 yuan of bad debt provisions accrued due to overdue financial management, the company's net profit to the parent will reach about 300 million yuan. In 2019, after deducting non-net profit of 195 million yuan (+80.26%), the main business performed well. The gross profit margin was 47.87% (-1.02 pp), mainly due to the increase in the price of the raw material heparin. The fee rate was 33.36% (+4.64 pp), where financial expenses increased significantly, from -9.13% to 0.73%, due to the reclassification of accounting standards. The company achieved revenue of 146 million yuan (-60.22%) in 2020Q1 and net profit of 25.35 million yuan (-128.37%), which was clearly impacted by the COVID-19 pandemic. However, the domestic epidemic is now coming to an end, and it is expected that the performance starting from 2020 Q2 will gradually return to normal levels.
The price of heparin APIs is high, and sales on the pharmaceutical side continue: in 2019, the company's API revenue was 751 million yuan (+20.44%). Thanks to the high price boom of heparin APIs, sales were basically flat. Considering that the number of pigs released in 2019 began to decline and the supply side was tight, the upward trend in prices in 2020 is expected to continue. Revenue from the formulation side is 923 million yuan (+32.19%), of which heparin sodium injections are about 160 million yuan (+40%), and the unit price has risen to around 7 yuan; the total Yikai+Yimei is close to 700 million yuan, of which Yimei's growth rate is over 30%; low-molecular heparin sodium injections exceed 100 million yuan, with sales of close to 4 million. Among them, enoxaparin is expected to double in 2020.
The R&D system is extensive, and the dark horse of innovation is worth paying attention to: in July 2018, QHRD107, the first class of new drug, received clinical approval, and in November 2019, ZHB202 received clinical approval again. The company's dark horse of innovation was evident. Currently, the company has a macromolecule drug research and development platform dominated by Zhonghong Biotech and a small molecule drug research and development platform dominated by InnoShengkang. In addition to the above varieties, the company's two new drugs, ZHB206 and QHRD110, have completed all pre-clinical research work and are being declared for clinical use. In addition, several innovative drug projects are in different stages of research, and the company's innovative drug pipeline continues to be enriched.
Profit forecasting and investment ratings: The company's main business maintained impressive performance, and the majority shareholders' participation in the employee stock ownership plan in 2019 showed confidence in future development. Considering the impact of COVID-19, we lowered our 2010 to 2021 EPS forecast to 0.23 yuan and 0.27 yuan (the original forecast was 0.28 yuan and 0.35 yuan). We expect the 2022 EPS to be 0.32 yuan, and the current stock price corresponding to the company's 2020 PE is 20 times higher. However, the COVID-19 pandemic is a transient impact. Looking at the company's development in the medium to long term, we maintain the “recommended” rating.
Risk warning: 1) Research and development risk: New drug development is a high-risk and high-return act. It requires multiple pharmacological, toxicological, pre-clinical, and clinical trials, etc., and there is a possibility of failure; 2) Bad debt risk: At the end of 2019, the company's financial management was overdue for a total of 430 million yuan, and there is a risk that further bad debts will be calculated later. However, if it is successfully recovered, the calculated portion will be added back to net profit; 3) Risk of fluctuations in heparin API prices: API prices are volatile. Although the share of business is already low, if heparin API prices falls, it will still affect the company's revenue and profit volume.