Sihuan Pharmaceutical is a long-term leading enterprise in the field of cardiovascular and cerebrovascular medicine in China. With its forward-looking layout of innovative drugs and medical beauty in 2008-2014, the company has successfully transformed to medical beauty and high-quality medicine and opened a new chapter in the development of its traditional main business under policy disturbance in recent years.

Botulinum toxin market: with the improvement of penetration and standardization, the formal market accelerates development. In 2020, China's botulinum toxin market shipped about 4.4 million bottles, the shipping market size exceeded 4 billion yuan, the global market shipping volume reached 5 billion US dollars, China accounted for 14% of the market. We expect the shipping market to exceed 8 billion yuan in 2023, with a compound growth rate of 25% in the next three years, mainly from the improvement of consumer penetration and the standardized supervision of the parallel import market. The size of the domestic botulinum toxin parallel import market is about 2 times or more than the formal market. With the tightening of supervision, this part of the market is gradually cleared, and the formal market space will be further released.

The examination and approval of botulinum toxin in China is strict, and at present only four products have been approved. as one of the newly approved products, Letibao has the advantages of high performance-to-price ratio and a time window of 2-3 years. At the same time, as a Korean brand with a market share of 37% in the domestic parallel import market before it was approved, Letibao has gained a high market awareness and can absorb this part of the transfer demand in the process of clearing the parallel market and continue to seize market share.

Medical and beauty business: cut in with botulinum toxin, agent + self-developed pipeline is rich. In October 2020, Hugel, Inc., a Korean biopharmaceutical company, was the sole agent of the company. Letibao, a botulinum toxin for injection, was officially approved by China's State Drug Administration to be listed on the market, becoming the fourth botulinum toxin type An approved to be listed in China and the first of its kind in South Korea. Letibao has two advantages, and we expect to release it quickly in the next three years: 1) the product end: Letibao has 99.5% effective protein content and high purity 900KD protein, which is higher than the 95% standard of Korea Drug Regulatory Administration. Its effectiveness and safety have been clinically verified and the difference is small, but the price is only 60-70%, which is very cost-effective. 2) Channel side: Yan Yan Space as the main body of medical beauty business operation, the core management has rich experience in medical beauty sales, and the professional marketing network covers 200 + cities. The medical and beauty sales team has worked for multinational pharmaceutical and medical companies such as Erjian and Pfizer, with more than 10 years of industry experience, and its main sales management is Eljian's national champion in 2014. As of December 2020, Yan Yan Space has a sales team of 60 million, agents 40 + (leading a sales team of about 450 people), covering 200 million cities and 800 medical and aesthetic institutions. The channel construction is perfect and goods can be delivered quickly. We expect to ship about 600,000 bottles this year, accounting for 30% of the market in the next three years. The company has set up a Medical and Beauty products Research Institute in Southern California to build high-quality medical and beauty pipelines. More than 10 kinds of products are being studied, and a number of blockbuster products will be on the market within 3 years. Among them, the hyaluronic acid represented by the company is expected to be approved in 2021, Yan Shui Ning is expected to be listed before the end of 2022, and other products such as child facial needles and young girl needles may be listed one after another in the next 3-4 years. The company's medical and beauty product matrix is being built steadily, and the layout of the medical and beauty track is gradually deepening.

New pharmaceutical business: innovative drugs are the main axis, and the field of diabetes is underestimated. Since its establishment, the company's innovative drug platform Xuanzhu Biology has invested more than 2 billion yuan in the field of innovative drugs. at present, it has more than 20 product pipelines under research, focusing on the markets of oncology, metabolism, infection, digestion and male health. In the next 2-3 years, Xuanzhu Bio will usher in a focus on the launch of key products: a new generation of PPI Anaprazole Sodium (expected to submit NDA), native Chinese CDK4/6 inhibitors to represent Pyrrosini in 2021 (Phase II-III clinical, expected to submit XZP-3621 in NDA), non-small cell lung cancer field in 2022 (Phase I clinical, expected to submit NDA in 2023) In addition, a new generation of aminoglycoside antibiotics Plazomicin and 1.1 carbapenem antibiotics are also in the clinical stage of III. In January 2021, the company announced the acquisition of Kangming Baiao, an innovative biological company focused on the research and development of innovative anti-ADC and other multi-functional antibody drugs. According to the valuation of 4.5 billion yuan after investment in Xuanzhu biological financing in August 2020 and the historical financing valuation of Kangming Baiao, it is conservatively estimated that the overall value of Xuanzhu biology should be more than 5 billion yuan, and the corresponding value of 72.99% of the company's shares is about 3.65 billion yuan. According to the current strength of Xuanzhu creature, it is entirely possible to realize the value transition in the future.

Huisheng Bio is an 82.68% diabetes enterprise platform owned by Sihuan Pharmaceuticals. Since 2014, when Sihuan Group signed an insulin development agreement with Chongqing Paijin, there are more than 40 product lines for diabetes and its complications represented by 1.1 new drugs, such as Garglegin, Degu Insulin and Mendong Insulin. It covers the full range of products such as new insulin, third-generation insulin, second-generation insulin, SGLT-2, GLP-1 and so on. Huisheng Biological is currently carrying out internal share reform, the company plans to complete the first round of financing in the first half of 2021, and achieve Science and Technology Innovation Board or gem listing in 2023. The subsequent increase in the valuation of Huisheng biology is expected to lead to an increase in the valuation of the pharmaceutical sector.

Traditional medicine business: structural optimization is under way and is expected to bottom out this year. The company's income from non-cardiovascular and cerebrovascular drugs has increased rapidly, from 168 million yuan in 2015 to about 1 billion yuan in 2020, with a compound growth rate of about 45%. On this basis, the proportion of cardiovascular and cerebrovascular products dropped to 81% in 2019 and to 50-60% in 2020, and the proportion of revenue from key monitoring catalogue products dropped to 23% from 70% in 2019.

It is expected that with the approval of NMPA for the new indication of cinepazide maleate injection in the treatment of acute ischemic stroke in 2020, the impact of key monitoring catalogue varieties on the company's revenue will be significantly reduced. Non-cardio-cerebrovascular products and cardio-cerebrovascular potential varieties are expected to support the compound growth of about 30% of the traditional medicine business in the next three years.

Profit forecast: the company is expected to achieve a homing net profit of 875 million, 1.313 billion, 1.945 billion yuan from 2021 to 2023, corresponding to a growth rate of 84.9%, 50.1%, 48.1%, 0.09, 0.14, 0.21 yuan per share, and PE26/17/12X. We use the method of segment valuation to value the company's new business of medical beauty, traditional medicine and medicine. In 21, the expected profit of the medical and American part is 230 million yuan, and the target market value is 19.55 billion yuan; the expected profit of the traditional medicine part is 645 million yuan, and the target market value is 12.9 billion yuan; the new pharmaceutical business Xuanzhu biological equity value of 3.65 billion yuan, do not calculate the biological value of Huisheng, a total of 36.1 billion yuan, corresponding to 43.58 billion Hong Kong dollars The target price is 4.604 Hong Kong dollars, corresponding to 3.814 yuan. Cover for the first time, giving a "buy" rating.

Risk tips: botulinum toxin product sales are not as expected; medical and beauty follow-up product research and development is not as expected; drug research and development is not as expected; drug revenue growth is slowing; market competition aggravates the risk.