Lay out the whole pharmaceutical industry chain and create the leader of high-end traditional Chinese medicine preparation. For nearly 30 years, the company has 80 drugs for cardiovascular, cerebrovascular, respiratory, paediatrics, orthopaedics and other diseases, including 23 basic drugs and 52 medical insurance products. There are 4 varieties of traditional Chinese medicine (compound Qinlan oral liquid, Xueshuantong capsule, Xuesaitong for injection (freeze-dried) and Xiaoer re Suqing syrup). In recent years, the company has continuously optimized the product structure, increased R & D investment, and formed a full product line layout of traditional Chinese medicine, chemical medicine, biological medicine, generic medicine and innovative medicine. In addition, the company has Bozhou traditional Chinese Medicine Commodity Trading Center, the country's first spot trading platform for bulk Chinese herbal medicines, using the business model of "Chinese herbal medicines + Internet + warehousing and logistics + quality inspection traceability + financial services + information services". Create a modern market circulation system for traditional Chinese medicine. Relying on the two-wheel drive of "pharmaceutical industry + pharmaceutical commerce", 2022Q1-Q3 achieved revenue / return net profit of 3.32 billion yuan, which was + 22.77% and 36.68% respectively compared with the same period last year. The growth at the income end is mainly due to the contribution of the business of traditional Chinese medicine, while the decline in profits is mainly due to the impact of the epidemic situation and the decline in sales of major products. We believe that in the short term, with the comprehensive optimization of prevention and control policies, the company's demand for traditional Chinese medicine products is expected to recover, and in the medium term, based on new tracks such as secondary development, product mergers and acquisitions, new drug research and development and traditional Chinese medicine formula granules, the growth potential of core products is relatively strong. long-term benefit from the expansion of cardio-cerebrovascular market and R & D investment in chemical and biological drugs under the background of aging.

Traditional Chinese medicine plate: injection and oral preparation as the core, take advantage of the policy Dongfeng sales are expected to pick up. The core products of the company's injection are Xuesaitong for injection, Shuxuening injection, etc., and the core products of oral preparation are Xueshuantong capsule, compound Qinlan oral liquid, Xiaoer Resuqing syrup and so on. Among them, Xuesaitong for injection can activate blood circulation and remove blood stasis, dredge veins and activate collaterals, for stroke, hemiplegia, cerebrovascular diseases, etc., won the "2021 clinical value of proprietary Chinese medicine brand list", 2021 sales of 23.8973 million, affected by the epidemic year-on-year decline of 66.43%; Xueshuantong capsule has maintained rapid growth in recent years, and the sales revenue in 2021 has increased by more than 36% compared with the same period last year. This product has become another potential product for the company in the cardiovascular and cerebrovascular disease market.

In terms of business plate, the company insists on giving priority to traditional Chinese medicine and high-quality development of biomedical pharmaceuticals; in terms of products, the company forms a product layout with injection Xuesaitong 100mg, Xueshuantong capsule and compound Qinlan oral liquid, supplemented by other general medicine products. In recent years, the health insurance policy is good for core products. Products such as Xueshuantong capsule and compound Qinlan oral liquid in the new version of medical insurance in 2021 have been cancelled, and the restriction of "payment by medical insurance fund only for outpatient use of insured personnel and drug purchase at designated pharmacies" has been cancelled. Insured patients can also enjoy medical insurance reimbursement policy for in-patient use in medical institutions. In 2022, the new version of health insurance adjusted the payment scope of Xuesaitong for injection (freeze-dried) and Xuesaitong injection, and abolished the payment restriction of "patients with stroke hemiplegia or central retinal vein occlusion". The scope of medical insurance reimbursement for the company's main products has been expanded. Xuesaitong for injection (freeze-dried) and Xuesaitong injection achieved sales revenue of 396 million yuan in the first three quarters of 2022 respectively, accounting for 39.28% of the pharmaceutical industry. 2.62%. The gradual lifting of health insurance restrictions will boost the volume of the company's core products.

Carry out the research and development of traditional Chinese medicine based on the three major platforms, and actively distribute chemical and biological drugs. According to the 2021 Drug Review report released by the State Drug Administration, there were 54 innovative traditional Chinese medicines in 2021, an increase of 134.78 percent over the same period last year, and the growth rate exceeded that of innovative chemical drugs and innovative biological products. On February 10, 2023, the State Drug Administration issued the Special regulations on the Registration and Administration of traditional Chinese Medicine. it defines the rational application of the experience of human use of traditional Chinese medicine, as well as the development principles and technical requirements of the registration and classification of innovative drugs of traditional Chinese medicine, improved new drugs of traditional Chinese medicine, ancient classical traditional Chinese medicine compound preparations, drugs of the same name, and so on. As of June 2022, 1) in the research and development of traditional Chinese medicine, the company focuses on secondary development, new drugs of traditional Chinese medicine, hospital preparations, formula granules and mergers and acquisitions of traditional Chinese medicine. The secondary development of ①: the company focuses on the secondary development of core products by adding new specifications, increasing the content of active ingredients and increasing indications, and cooperates with many hospitals and universities. Four secondary development projects of traditional Chinese medicine are under research. ② new traditional Chinese medicine: there are 3 kinds of innovative drugs under research, including gynecology, oncology, digestion and metabolism and other fields. ③ in-hospital preparation field: the company has completed the development and filing of 49 in-hospital preparation varieties, and is carrying out the research and development of 3 in-hospital preparation registration projects. 2) in the research and development of chemical drugs, the company focuses on the field of antiviral and anti-tumor, and there are four innovative drug projects. ZBD1042 project, as a neuraminidase inhibitor, is a class 1 innovative drug for the prevention and treatment of influenza virus infection, and is an antiviral drug for systemic use. the standard drug is the first new anti-influenza drug paramivir sodium chloride injection in China, and it is the only neuraminidase inhibitor injection on the market in China. At present, the phase I clinical study in China has been completed. 3) Biopharmaceuticals R & D, the company joined Zhejiang Tris Pharmaceutical in 2021, focusing on tumors such as breast cancer, lung cancer and other major tumor diseases, with ADC as the core product, synchronous layout of monoclonal and double antibody products, and creating an important product line of biomedicine.

The R & D cost of 2022Q1-Q3 is 43 million yuan (+ 16.21%). The company has built a "one heart and four hospitals" R & D system and set up a R & D team of more than 200 people, including more than 100 doctoral, master's degree and senior professional titles, accounting for more than half of the R & D personnel.

"Shennongcai" + "Shennongcang" to create an online and offline integration model to promote the vigorous development of traditional Chinese medicine trade. The company's trade income of traditional Chinese medicine reached 2.189 billion yuan in 2021, an increase of 176.77% over the same period last year, and has maintained rapid growth for three consecutive years; gross profit was 121 million yuan, an increase of 1078.20% over the same period last year. Relying on the strategic layout of Nao50 producing area of the trading center (i.e. "N" is based on Bozhou Trading Center and Harbin Trading Center as the carrier; "50" refers to 50 or more offices of producing areas to distribute the trading network of Chinese herbal medicines in the national genuine medicinal materials producing areas), the platform has been constructed to promote the platform and expand users. In addition, in conjunction with Shennongcai, the third-party online e-commerce trading platform for traditional Chinese medicine, and Shennongcang, the country's first warehouse-style hypermarket for traditional Chinese medicine, the company insists on the simultaneous development of the platform and the proprietary model. The platform has set up "Shennong Cang" and "Origin Cang" self-run special areas, through the combination of online and offline sales platform, and pharmaceutical enterprises, prepared slice factories and other downstream demand side for supply and demand direct connection. Realize the quality traceability and quality price advantage of medicinal materials. Offline, the origin of goods in Bozhou "Shennong Cang" display, to create "Shennong Cang" producing elements, to promote the "Shennong Cang" and "Origin Cang" integrated development, through "Shennong Cang" on-site sales and off-site sales to broaden sales channels; online, the use of "Shennong Cang" platform for promotion and drainage and set up the "Shennong Cang" online area. The company has formed an online and offline integrated transaction model, and through the "unified quality inspection, unified warehousing, unified packaging, unified purchase and marketing, unified settlement, unified management" six unified management model to complete the platform trade process and achieve sales revenue.

The company has achieved remarkable results in fee control, and profitability is expected to pick up. The sales expense rate / management expense rate / financial expense rate of 22Q1-Q3 was 11.67% 7.03% 2.97% respectively, which decreased by 7.04pct/2.15pct/0.93pct compared with the same period last year. The decline in the rate of sales expenses is mainly due to the substantial increase in revenue from the trade of traditional Chinese medicine. In 2021, the sector achieved revenue of 2.189 billion yuan (+ 176.77%), accounting for 53.04% of revenue (+ 29.80pct). The pharmaceutical industry plate maintained a high gross profit margin, while the commercial sector gross profit margin recovered. In 2021, the gross profit margin of the pharmaceutical industry sector was 80.83% (- 4.49pct), but remained above 80%; the gross profit margin of the pharmaceutical commercial sector was 6.42% (+ 2.15pct). We believe that the gross profit margin of the commercial sector in the future is expected to continue to increase with the development of the new business model and the expansion of the business scale. With the improvement of the efficiency of superimposed management and the improvement of the marketing system, the cost control is better, and the company's profitability is expected to be further strengthened.

Investment suggestion: the company has ploughed the field of traditional Chinese medicine for nearly 30 years, opened up the upstream and downstream industry chain, and actively laid out the new track of chemical and biological drugs in accordance with the policy guidance. We estimate that the company's operating income from 2022 to 2024 will be 5.045 billion yuan, 6.159 billion yuan and 7.432 billion yuan respectively, the net profit will be 301 million yuan, 392 million yuan and 497 million yuan respectively, and the EPS will be 0.32 yuan, 0.42 yuan and 0.53 yuan respectively, corresponding to the closing price of 13.90 yuan on March 8, and the PE will be 43x, 33x and 26x respectively.

Risk hint: research and development is not as expected, medical policy and drug collection risk, and net profit may decline for two consecutive years.