Investment advice
The company announced its 2022 results: revenue of 3.74 billion yuan, +310% year on year; Guimu's net profit was adjusted to 76.6 million yuan (loss of 590 million yuan in the same period last year). If changes in the fair value of financial instruments embedded in convertible bonds are not taken into account, adjusted net profit in 2022 was 8.1 billion yuan, and the company expects no additional losses on convertible bonds this year. With the optimization of epidemic prevention and control measures at the end of 2022, the promotion of OTC and e-commerce channels, and the demand for prevention and home drug preparation, we expect the penetration rate of the company's core variety, Kevai, to increase further in 2023/24. Raise the stock rating from “neutral” to “outperform the industry.”
The reasons are as follows:
Covey's sales recovered significantly in 2022, and 2023 is expected to break its all-time peak. In 2022, revenue in granular/capsule dosage forms of Kevir (oseltamivir phosphate) was $2,509/5.1 billion, up 451%/496% year over year. Due to the optimization of COVID-19 prevention and control measures and the H1N1 strain being unpopular for a long time, the company expects influenza A to peak in March of this year and may return to normal distribution in mid-late April. At the same time, it believes that there is a possibility that there will be a small high incidence of influenza A in the southern provinces from May to June; Coway's shipments reached a historic peak in early March. The company expects non-influenza season shipments to remain stable, and sales of Kewei reached a record high this year. We believe that in the short to medium term, the company can use its brand and supply chain management advantages to maintain Kewai's 80% share in the domestic oseltamivir market: 1) Dosage form: granular dosage forms target the pediatric drug market with high customer stickiness and a good competitive pattern. Capsule dosage forms hedge collection risks through a dual brand strategy; 2) Channel: Hospital/retail sales account for about 70%/30% in 2022, and oseltamivir treatment of influenza is being extended from hospital treatment to prevention and household storage. We believe Kewi retail sales are expected to increase.
Medicines for hepatitis B and diabetes are expected to contribute to a considerable increase in income. 1) Hepatitis B: Emitavir phosphate (genotype I) entered medical insurance in December 2021. The company directed revenue of 200 million yuan in 2023; the full genotype product company is expected to start production by the end of 2023; 2) Diabetes: Second-generation/third-generation insulin was approved for marketing in 2020/2021, and the company directed medium- to long-term insulin revenue of 200 million yuan/more than 1 billion yuan in 2023.
Subsequent commercialization varieties are worth looking forward to. In the company's pipeline, Jungliflozin has entered clinical phase III, and liraglutide is awaiting NDA submission. The company expects the above products to be approved in 2024. At the same time, the company has priority domestic commercialization rights for the varieties being developed by Guangdong Dongyangguang Pharmaceutical Co., Ltd. (the controlling shareholder of the company).
What's the biggest difference between us and the market? We are more optimistic about the longevity of the Kewell product life cycle.
Potential catalysts: Flu epidemic fluctuations in southern provinces in summer, progress in product pipeline research and development.
Profit forecasting and valuation
Due to the recovery in sales exceeding expectations, we raised the 2023 EPS forecast by 131% to 1.38 yuan, introducing the 2024 EPS forecast of 1.74 yuan for the first time. The current stock price corresponds to the 2023/24 adjusted price-earnings ratio of 4.9x/3.7x. The rating was raised from neutral to outperforming the industry, and the target price was raised by 58.3% to HK$9.5, corresponding to the 2023/24 adjusted price-earnings ratio of 5.8x/4.5x, up 20% from the current stock price.
risks
Relying on a single product, R&D progress fell short of expectations, and policy suppression of prices exceeded expectations.