Incident: The company released its 2019 annual report and 2020 quarterly report. In 2019, the company achieved operating income of 2.41 billion yuan, an increase of 21.32% over the previous year, of which the company's self-produced product sales revenue reached 1.09 billion yuan, an increase of 30% +; realized net profit of 202 million yuan, a decrease of 2.55% over the previous year; realized net profit of 180 million yuan after deducting non-return mother's net profit of 180 million yuan, an increase of 4.47% over the previous year; net cash flow from operating activities was 250 million yuan, an increase of 96.29% over the previous year. The sharp increase in net operating cash flow is mainly due to the fact that the company attaches great importance to the cash flow management of the incremental business of new mergers and acquisitions, and continues to strengthen credit policy control. During the reporting period, the company achieved a gross profit margin of 44%, an increase of 3 pct over the previous year; a sales expense ratio of 16.7%, an increase of 1.5 pct over the previous year; the management expense ratio was 9.9%, an increase of 0.6 pct over the previous year; and the financial expense ratio was 0.97%, an increase of 0.73 pct over the previous year. Among them, interest expenses increased significantly, due to the acquisition and integration of core molecular diagnostic services and high-quality channel vendors.

Affected by the epidemic, the company's Q1 performance was under pressure in the short term. At the same time, the product made outstanding contributions to the fight against the epidemic. During the reporting period, the company achieved sales revenue of 537 million yuan, an increase of 6.13% over the previous year; net profit of 50 million yuan, an increase of 0.84% over the previous year; after deduction of net profit of 46.25 million yuan, a year-on-year decrease of -3.85%. During the reporting period, due to the impact of the COVID-19 pandemic, the number of regular outpatient emergency patients in domestic hospitals declined markedly, and the company's traditional biochemical immunization business was affected by the epidemic and revenue declined; on the other hand, molecular business sales revenue was boosted during the epidemic. The company is actively developing the market and sales of fully automated biochemical analyzers. According to the company announcement, the company successfully won sales orders for 100 excellent fully automated biochemical analyzers and has completed the supply of supplies to medical institutions in Wuhan to help prevent and control the epidemic and resume work and resume production in Wuhan. Faced with the outbreak of the novel coronavirus pneumonia epidemic in China, the company gave full play to its existing R&D advantages and product line advantages in the field of molecular diagnostics and successfully independently developed COVID-19 detection reagents. The company worked overtime to guarantee the production and supply of fully automatic nucleic acid testing workstations, nucleic acid extraction equipment and related extraction and detection reagents, provided technical support and service guarantees for disease control medical institutions, and contributed to the phased victory in the domestic fight against the epidemic in a short period of time. Fully automated nucleic acid testing workstations, nucleic acid extraction and amplification equipment, and related products such as extraction and detection reagents achieved sales revenue of over 100 million yuan. Aoran Biotech, a molecular diagnostic company in which the company has a stake, successfully developed a fully automatic fully enclosed fluorescence PCR all-in-one machine, which was requisitioned by Shanghai emergency for emergency investment in epidemic prevention and control. According to data from the State Council press conference, at the end of March, the number of hospital services in China had recovered to 60% of previous years. As the subsequent medical order is gradually restored, the company's performance growth is expected to pick up.

The company attaches importance to product development and iteration, laying a good foundation for long-term development. As of Q1 2020, the company was developing a total of 80 new projects, of which a total of 17 projects were being applied for registration. According to the company announcement, the new-generation Polaris series fully automated biochemical analyzers Polaris C1000, Polaris C2000, and the fully automated chemiluminescence immunoanalyzer Polaris i2400, developed independently by the company in 2019, have obtained registration certificates. After years of independent research and development, technical parameters have benchmarked industry-leading levels, and obtained a number of invention patents and utility model patents. The Polaris C2000 fully automated biochemical analysis system has a stand-alone detection speed of 2000 tests/hour, can be combined in a modular way, and orbital batch sampling is possible; the Polaris i2400 chemiluminescence immunoassay system has a maximum measurement speed of 240 tests/hour, and is expandable to support multiple biochemical and immune systems. The fully automated chemiluminescence immunoanalyzer AL1200 obtained CE certification through approval, further enriching the company's product line. As of 20Q1, the company has successfully launched the Polaris series of fully automated biochemical analyzers, and has been installed in biological products enterprises and level/level-II hospital terminals in Shanghai, Gansu, Anhui, Shandong, Liaoning and other provinces and cities. Furthermore, the Polaris i2400, Polaris 1800, and Polaris fully automated modular bioimmune analysis systems are expected to be successfully launched in the second half of 2020, further expanding the company's product line.

The company continues to promote channel collaboration, strengthen terminal resource sharing, and further improve sales system construction. By integrating superior channel resources, the company will further promote sales of self-produced products, continue to consolidate the market competitive advantages of biochemical product lines and enzyme free product lines, and give full play to the core competitive advantages of its own products. In 2019, the company's channel companies achieved a year-on-year increase in sales of Kehua's own reagents by more than 40%. The company's marketing center works with regional core distributors to push Kehua products into terminals and use the unique and overall advantages of each product line to establish a unified market expansion solution. According to the company announcement, in 2019, the company successfully won the bid for the Hitachi highest-end SSSSS biochemical assembly line project at the Hunan Provincial People's Hospital, reached a 008AS strategic cooperation project with Wuhan Runda, and won the bid for a local comprehensive AIDS prevention project subsidized by the Guizhou Provincial Central Committee. Furthermore, the company reached a strategic cooperation agreement with Qianmai Medical to promote the development and cooperation of products and markets in the fields of biochemistry, immunity, and molecular diagnostics, and to carry out all-round cooperation in the fields of collection and packaging and construction of regional testing centers.

Investment advice: We expect the company's revenue growth rates from 2020 to 2022 to 15.0%, 25.0%, and 20.0% respectively, and net profit growth rates of 14.4%, 21.9%, and 19.3% respectively, with outstanding growth. For the first time, we gave an investment rating to buy -A, and the target price for 6 months was 20.25 yuan, which is equivalent to a dynamic price-earnings ratio of 45 times 2020.

Risk warning: There is still uncertainty about the epidemic; development and promotion of new products fell short of expectations.