Incident: The company released its 2022 annual report. It achieved revenue of 6.65 billion yuan (yoy -13%) in 2022, achieved net profit of 624 million yuan (yoy -9%), and net profit of 571 million yuan (yoy -16%) after deducting non-return mother's net profit. Among them, traditional Chinese medicine formula granules and tablets achieved revenue of 3.36 billion yuan (yoy -21%), finished drugs achieved revenue of 1,361 million yuan (yoy +18%), medical devices achieved revenue of 1,261 million yuan (yoy -19%), excipients and APIs achieved revenue of 545 million yuan (yoy -12%), and others achieved revenue of 123 million yuan (yoy +13%).

Comment:

1. The short-term switching of national and provincial standards has put pressure on the growth of formula granules. It is expected that 23 will usher in an inflection point. In 2022, the company achieved revenue of 6.65 billion yuan (yoy -13%), of which revenue of traditional Chinese medicine formula pellets and tablets was 3.36 billion yuan (yoy -21%). The formula pellet business contributed about half of the revenue. The core reasons for the decline include: ① 2022 is in the stage of switching between new and old standards, and the supply of all varieties has not been achieved, leading to restrictions on short-term formulations. ② Medical terminals are enterprise standard products previously stored before digesting the new standards and promulgation. ③ The impact of the macro-environment has put pressure on the expansion of formula pellets in channel sales. Although the overall growth of elderly granules is under pressure in 2022, the company has not stopped developing and expanding channels. In 2022, the company actively participated in the application of national and provincial standards for formula pellets. The national standard application project submitted 50 varieties in accordance with the requirements of the Pharmacopoeia Commission, and 32 were selected; the number of provinces and cities involved in the provincial standard application project was 25. At present, the number of national standards issued has reached 248. As the pace of national standard introduction accelerates, we expect that the number of national standards issued this year may exceed 300. We believe that the number of national standards issued in 2023 is expected to usher in an upward inflection point in growth.

2. Proprietary Chinese medicines increased by 31%, and various products in the device sector were in the testing stage. The finished drug business achieved revenue of 1,361 billion yuan (yoy +18%) in 2022. Among them, proprietary Chinese medicine hematopic injections contributed 817 million yuan (yoy +31%) to revenue, accounting for 60% of finished drug revenue. Hemobicin injection has filled the gap in sepsis treatment in the world. It is a new national drug approved for systemic inflammatory response syndrome (SIRS), sepsis (Sepsis), multiple organ dysfunction syndrome (MODS), severe novel coronavirus pneumonia, critical systemic inflammatory response syndrome, and/or multiple organ failure. Currently, there is still plenty of room for market expansion, and is expected to continue to grow rapidly in the future. In the medical device sector, Beijing Chaosi currently mainly focuses on blood oxygen series products. The company currently has several products in the testing stage, such as intelligent medical oxygen concentrators, multi-parameter medical health testing and management all-in-one machines, handheld pulse oximeters, low-frequency therapy devices, etc. We believe that with the subsequent launch of various equipment products of Beijing Chaosi, the equipment sector is still expected to contribute the second growth impetus.

Profit forecast: We estimate that the company achieved revenue of 8.613 billion yuan, 10.136 billion yuan, and 11.949 billion yuan respectively in 2023-2025, up 30%, 18%, and 18% year-on-year, respectively. Net profit attributable to the mother in 2022-2024 is estimated to be 953 million yuan and 1,221 million yuan 1,505 million yuan, up 53%, 28% and 23%, respectively. Corresponding to the current stock price PE is 19 times, 15 times, and 12 times, respectively. Maintain a “Highly Recommended” rating.

Risk warning: The formula pellet market is expanding risks, price increases for formula particles are blocked, there is a risk of collecting formula particles, market competition is increasing the risk, and product sales fall short of expectations.