Report guide

We believe that the expansion of the domestic pharmaceutical business is of great significance to the expansion of pharmaceutical export channels. As a pharmaceutical exporter, Huahai Pharmaceutical's accumulation of market-based competitiveness during more than ten years of internationalization and expansion has established its advantage of seizing the institutional dividends of the normalization of domestic pharmaceutical collection (“flowers outside the wall, incense within the wall”). This is a reduced-dimensional entry. We are optimistic about the company's comparative advantage in the forward integration strategy expansion process, which also lays the foundation for a real increase in the competitiveness of customized agent exports.

Key points of investment

Investment advice:

Based on a comparative analysis of product accumulation and channel development, we believe that Huahai Pharmaceutical is a domestic API export leader and a pioneer in forward integration. It has formed a diversified product hierarchy, a more mature production quality management system and registration experience during the formulation internationalization process. Under the domestic volume procurement environment, revenue growth in the formulation business is expected to continue to exceed expectations through integrated cost advantages. Taking into account the iteration of the company's API and the pharmaceutical ANDA variety echelon, we are optimistic about the company's medium-term growth space and the sustainability of short-term and medium-term performance growth, covering the “buy” rating for the first time.

Market Divergence: Time and Space for Pharmaceutical Export Leaders to Grow

Investors generally believe that the prosperity of the company's domestic pharmaceutical business is expected to continue to rise in 2020-2022. They are more appreciative of the expansion and implementation of the business path of “ANDA reporting/double reporting → rapid promotion of domestic volume procurement → incremental profit”. The point of difference is: ① Under normalization of collection, how much profit (market value) will the company grow into a generic drug company in the long term? ② As the volume gradually expands, how much of the new pharmaceutical varieties and API varieties stored in the medium term can contribute to the growth rate of performance? ③ Faced with occasional production quality issues, how can we reasonably anticipate the risks and growth potential of the API business?

Pharmaceutical business: Looking at the five-year dimension, the potential revenue space for domestic production of 4.5-6 billion dollars, and the overseas revenue potential of 35-4.5 billion dollars. Domestic formulations are viewed from the perspective of collection. Considering factors such as expected collection of winning varieties, changes in the market share of collected unwon varieties, new US ANDA and domestic approved varieties, original research substitution space for original research and increased penetration of the varieties already collected, we estimate that in a five-year perspective, domestic pharmaceutical business revenue is expected to reach 45.6 billion yuan.

Overseas formulations look at space and elasticity from the approval of new varieties and the resumption of business in the US. We have considered the possibility of passing the US FDA inspection in 2021, not considering the increase brought about by the addition of ANDA. We estimate that in a five-year dimension, US pharmaceutical revenue is expected to reach 35-4.5 billion yuan.

From an integrated leader to a leader in imitation upgrading: strategic planning and sales system construction to lay the foundation for sustainable growth

We believe that the development path of Huahai Pharmaceutical is an expansion from a domestic API integration leader to a global imitation upgrade leader. Based on this perception, we believe that the growth in the company's short to medium term performance is mainly driven by the entry of the pharmaceutical business into a new boom cycle (domestic collection, recovery of the US pharmaceutical business and diversification of varieties) and the API product echelon. Looking at the medium to long term, we believe that generic drug strategic planning and domestic sales team building are expected to support the continued growth of the generic drug business. At the same time, we suggest that this process combines the increase in profitability and product enrichment brought about by the scale effect of the company's APIs. This also lays the foundation for the enhancement of long-term international competitiveness and truly verifies the cost and variety base of the company's leading pharmaceutical exporters.

New thinking about valuation discounts: Short-term event disturbances vs. API growth attributes How to properly understand short-term event disturbances in the API industry and the growth brought about by variety iteration is an important evaluation variable for companies in this industry. We pay more attention to variables such as variety strategy, iterative ability, and degree of verification.

The international competitive advantage of product-based API companies often comes from process and scale, and we may have to adapt to a normalization of “finding impurity → setting standards → solving imperfects/defects”. We believe that Huahai Pharmaceutical is one of the companies with the most international API certifications and the most complete API product lineup among domestic API pharmaceutical companies. The API portfolio includes many new large-tonnage varieties that have already been registered; if you pay too much attention to the short-term impact of impurity time, it is easy to miss out on long-term opportunities for the company to upgrade new API varieties and distribute commercial quantities.

Profit forecasting and valuation

Based on the analysis of the company's core business segments, we expect the company's EPS in 2020-2022 to be 0.84, 1.16, and 1.4 yuan/share, respectively. The closing price on November 12, 2020 corresponds to 39 times PE in 2020, which is slightly higher than the average of comparable companies. We believe that the company is a leader in domestic API exports and a pioneer in forward integration. It has formed a diverse product hierarchy, a more mature production quality management system and registration experience during the formulation internationalization process.

Compared with comparable generic drug companies, we believe that the company's comparative advantage in profitability under the normalization of volume procurement is expected to continue to be reflected; compared to comparable API companies, we believe that the quality and registration ability of the company's API has been verified, and the product's ability to iterate horizontally is stronger. Taken together, we think there is still room for improvement in the company's valuation, covering the “buy” rating for the first time.

catalytic

Major varieties passed domestic review or ANDA approval; core varieties were collected and bids won, etc.

Risk warning

Risk of core variety collection flow; risk of FDA inspection being slower than expected; risk of overseas litigation compensation higher than expected; risk of performance volatility due to export remittance locks; production quality management risk, etc.