Key points of investment
Xinhua Medical is a leading domestic medical device enterprise. In the context of state-owned enterprise reform, management has been significantly optimized, the transition to the high-end has accelerated, and profitability has increased rapidly. We believe that the company is in a cycle of high revenue growth and profit upward brought about by management optimization and product innovation. High revenue and profit growth can be expected in 2023-2025.
Xinhua Healthcare: Focus on the main business, reduce costs and increase efficiency, old leaders are now focusing on the main business, and the share of medical equipment & pharmaceutical equipment revenue has steadily increased. Xinhua Medical is an established leader in medical devices in China. After years of development, its business covers the four directions of medical devices, pharmaceutical equipment, medical commerce, and medical services. In 2017, the company proposed to focus on its main business (medical devices & pharmaceutical equipment) and shift from scale growth to efficiency growth. In 2018-2022, the company's two core segments were medical devices (revenue share increased from 22% to 41%) and pharmaceutical equipment (revenue share increased from 8% to 16%), and revenue share increased steadily.
Focus on efficiency, a period of steady increase in gross margin. Since 2017, the company proposed the strategy of “removing inefficient assets” and “shifting from scale growth to efficiency growth”, it has gradually divested inefficient subsidiaries and focused on the two major sectors of medical devices and pharmaceutical equipment, driving gross margin to increase year by year. In 2018-2022, the company's gross margin increased from 20.0% to 26.4% year by year. We are in a period of steady increase in profitability.
Marginal changes: significant optimization of management, acceleration of high-end switching
Marginal change 1: State-owned enterprise reform & equity incentives promote a steady increase in profitability. (1) State-owned enterprise reforms have been implemented, and the quality of company operations has improved. On June 30, 2020, the 14th session of the Central Committee on Comprehensive and Deepening Reform deliberated and approved the “Three-Year Action Plan for State-owned Enterprise Reform (2020-2022)” to promote the optimization of the layout, structure, vitality and efficiency of state-owned enterprises. Xinhua Healthcare made increasing gross margin an important goal, optimizing the product structure, reducing costs and efficiency, and implementing equity incentives. Gross margin increased year by year in 2018-2022. We believe that with further optimization of corporate governance, there is still room for further improvement in the company's profitability; (2) Equity incentives: 2020-2024 The annual net profit of non-return to the mother is 23% CAGR, and the rapid growth trend is gradually showing. In November 2021, the company announced the “2021 Restricted Stock Incentive Plan (Draft)” and proposed the 2022-2024 equity incentive assessment target. Based on the equity incentive assessment requirements, the company deducted 23% of the company's net profit CAGR from non-return to the parent in 2020-2024, and the rapid growth trend gradually became apparent; in March 2023, the company disclosed the “Notice on the Implementation of the Equity Incentive Plan for Subsidiaries”, and the subsidiary Xinhua Surgical Instruments Co., Ltd. implemented equity incentives. We believe that with the continued implementation of the company's equity incentives, the company's employees are expected to be motivated With further improvements, profitability is expected to continue to grow.
Marginal change 2: Management capacity has improved significantly, and is expected to bring about continuous marginal improvements in operations. We believe that as a state-owned enterprise that has been in existence for 80 years, the company's business is cumbersome and complex, and the evaluation of management capabilities is essential. In 2020-2022, the ratio of company managers' remuneration to period expenses increased steadily (from 12% to 14%). Judging from management results, the company's balance ratio declined in 2020-2022 (from 58% to 55%); in 2020-2022, the company's overall ROA (return on total assets) and net revenue/total profit from operating activities showed an upward trend, and profitability and revenue quality improved steadily. We believe that the company is in a period of improving management capabilities, which is expected to bring about continuous marginal improvements in operations.
Marginal change 3: constant increase implementation, outstanding ability to innovate, and acceleration of high-end switching. In February 2023, the company disclosed the “Report on the Issuance of Non-public Issuance of Shares”, which raised 1,284 million yuan (issuing 54.90 million shares, of which Shandong Health subscribed 32.7%), mainly for flexible processing production lines, high-end precision minimally invasive equipment, intelligent production of small-volume formulations, and high-end medical equipment research and development. Judging from the fixed increase plan, the company is in a period of accelerating product high-end development. We believe that the high-end switch is expected to promote the competitiveness of the company's products, gross margin, etc., and continue to deepen the company's core competitiveness.
Profit forecasting and valuation
We expect that the company's revenue for 2023-2025 will be 107.12/12191/137.48 billion yuan respectively, up 15.4%, 13.8% and 12.8%, respectively; in 2023-2025, the company's net profit to the mother will be 7.67/9.18/1,078 billion yuan respectively, up 52.61%, 19.71% and 17.43%, respectively. The corresponding EPS will be 1.64/1.97/2.31 yuan (21 times PE in 2023), with reference to comparable companies, as shown by comparable companies, In 2023, 28 times PE, corresponding to 36% of the space, covered the “increase in holdings” rating for the first time.
Risk warning
Risk of policy implementation falling short of expectations; risk of commercialization of new products or market acceptance falling short of expectations; risk of increased competition in the industry; risk of M&A targets falling short of expectations.