Management expects that Yulin Pharmaceutical's year-long inventory removal cycle may come to an end in 2021, laying the foundation for future growth recovery
The company will continue its year-to-date stock repurchase program and has maintained its fiscal year 2020 dividend policy
We lowered the target price for the classification plus total valuation method from HK$8.0 to HK$7.7. Maintains a buy rating based on its low valuation, attractive dividend rate, and stock repurchase program
The growth rate of nephrology line products is expected to resume in the second half of the year
As the COVID-19 epidemic stabilizes in China, management expects the year-on-year growth rate of nephrology line products to return to around 10%-15% in the second half of the year. The company anticipates that uremia tablets, the main product of its nephrology line, will be an exclusive variety of traditional Chinese medicine, and that the risk of collection is relatively minimal. At the same time, urinalysis tablets are not included in the national and provincial drug key surveillance catalogues (this catalogue is used to monitor excessive prescriptions and control treatment costs). Management believes that the use of urea tablets for patients with chronic kidney disease has passed evidence-based medical research, so overall policy risks are manageable. At the same time, we noticed that the company's new product, ioparol injection, was launched in March and received approval from 24 hospitals, adding long-term momentum to its contrast agent product pipeline.
Yulin Pharmaceutical's performance may improve in 2021
Management expects that after more than a year of inventory removal, the original Yulin Pharmaceutical OTC channel inventory is expected to return to a healthy level in 2021. At the same time, management expects that its new marketing strategy centered on “brand+channel+terminal” will usher in a harvest period, which has now covered more than 305,000 pharmacies across the country. Although Yulin's sales in the second half of the year are still under pressure due to the uncertainty of the COVID-19 pandemic, we believe that improving its channel and product structure will promote the long-term development of OTC business
Lower the target price of the classification plus total valuation method from HK$8.0 to HK$7.7; maintain buying
We lowered the company's earnings forecast for fiscal year 20/21 by 9%/2% to reflect that sales in the second half of 2020 will still face challenges due to the impact of the pandemic. Based on the updated forecast, we lowered our target price to HK$7.7. In addition to Yulin Pharmaceutical, which may improve in 2021, management said it will continue to carry out stock repurchases to support stock prices (about 40 million shares of the company have been repurchased through the repurchase program since the beginning of the year). Based on the company's low valuation (5x/4x 20E/21E PER), sufficient net cash (estimated to be around RMB 900 million in cash by the end of 2020, accounting for about 37% of the current market value), and an attractive dividend rate (forecast dividend rate of 7% for FY21), we maintain our buying rating for Conson.