In the first half of 2023, the company's pharmaceutical industry and commercial sectors continued to contribute to performance growth. The R&D pipeline for various products progressed steadily, and the listing volume of the exclusive product Xinweining could be expected in the future. Considering the impact of Shanghai Pharmaceutical's Cansino asset impairment, etc., we lowered our 2023-25 net profit forecast to 52.92/63.55/6.914 billion yuan (original forecast of 65.48/65.32/7.161 billion yuan), the corresponding EPS forecast was 1.43/1.72/1.87 yuan, and the PE corresponding to the current stock price was 12/10/9 times, respectively. Refer to comparable company valuations (according to Wind's unanimous expectations, as of September 8, 2023, Sinopharm Co., Ltd. 10x, Liuyao Group 9x, and Runda Medical 17x, all 17x. (Value is 12X). Considering that the company is a leader in domestic pharmaceutical business integration and that its industrial and commercial business performance continued to grow rapidly during the reporting period, it was given 15 times PE in 2023, corresponding to the target price of A shares of 21 yuan (original 27 yuan), and the target price of Hong Kong stocks was 23 Hong Kong dollars (exchange rate 1.08), maintaining the “buy” rating.
The performance is in line with expectations, and the industrial and commercial business is developing rapidly. In 2023, H1 achieved revenue of 132,592 billion yuan, +18.70% year-on-year; net profit of 2,610 billion yuan, year-on-year, -29.38%, mainly due to the effects of the relocation income of its subsidiary Qingchunbao in the same period last year and one-time special gains and losses such as asset impairment preparations calculated by Shanghai Pharmaceutical Cansino, a company participating in the current phase. Net profit after excluding the impact was 3,076 billion yuan, +9.34% year-on-year; net profit without attribution was 2.199 billion yuan, -17.96% year on year. By business, the pharmaceutical industry achieved revenue of 14.699 billion yuan, +12.64%, and a profit contribution of 1,328 billion yuan, or +20.29%; the pharmaceutical business achieved revenue of 117.893 billion yuan, +19.50%, and a profit of 1,770 billion yuan, or +1.43%. The overall performance of H1 in 2023 was in line with expectations, and the pharmaceutical industry and pharmaceutical business continued to grow rapidly in revenue.
R&D investment has increased, and various pipelines are progressing steadily. In 2023, H1's R&D expenses reached 1,026 million yuan, +26.76% year-on-year. The company continued to increase R&D investment and steadily promoted various R&D pipelines. The company is developing a total of 64 new drug pipelines. Among them, NDA marketing applications for I001 tablets and X842 have been accepted, and clinical trial applications for B019 injections developed independently to treat recurrent or refractory B-lymphocytic tumors were also accepted by the State Drug Administration in August 2023. The new product introduced by the company, Xinweining, is a globally exclusive product. It was officially commercialized in May 2023. We expect to contribute considerable revenue in the second half of the year. Furthermore, the company is actively promoting the construction of the Shanghai Pharmaceutical Frontier Center and the Shanghai Pharmaceutical Center, strengthening industry-university-research cooperation, and promoting technological transformation and implementation. It is expected that more new drug projects will be incubated in the future to develop continuous competitiveness.
Traditional Chinese medicine is rich in resources, and the distribution business continues to empower. The company has rich resources in traditional Chinese medicine. Currently, it has 8 major directly managed traditional Chinese medicine companies and 9 core brands of traditional Chinese medicine. The revenue of the traditional Chinese medicine sector reached 5.120 billion yuan during the reporting period, +21.64% over the same period. The company will continue to promote a large variety and brand strategy, increase investment in scientific research for large single products, rely on rich traditional Chinese medicine resources, and combine the core technology platform of the Institute of Traditional Chinese Medicine, and is expected to successfully launch new traditional Chinese medicine products to contribute to performance growth in the future. In terms of the pharmaceutical distribution business, revenue from the innovative drug business increased by about 24% year on year during the reporting period, and 14 imported general-generation varieties were introduced; revenue from the general import vaccine business picked up, up 15.7% year on year; non-pharmaceutical businesses such as equipment and health achieved revenue of about 20.4 billion dollars, an increase of about 22.16% over the previous year. The company is committed to building an innovative pharmaceutical service platform, providing one-stop services covering pre-listing cooperation, import and export services, national circulation, and innovative value-added. The distribution business performance is growing steadily and continuously empowering.
Risk factors: Competition in the industry is intensifying; R&D progress of innovative drugs falls short of expectations; performance of extended mergers and acquisitions falls short of expectations; profit falls short of expected risk.
Profit forecasting, valuation and rating: The company adheres to the “industrial and commercial research and investment” integrated development model. In 2023, H1's pharmaceutical industry and commercial sector performance grew well, and various product development pipelines progressed steadily. It is expected that the exclusive product Xinweining will continue to expand after it is officially commercialized, contributing to a new round of performance growth. Considering the impact of Shanghai Pharmaceutical's Cansino asset impairment, etc., we lowered our 2023-25 net profit forecast to 52.92/63.55/6.914 billion yuan (the original forecast was 65.48/65.32/7.161 billion yuan), the corresponding EPS forecast was 1.43/1.72/1.87 yuan, and the PE corresponding to the current stock price was 12/10/9 times, respectively. Refer to comparable company valuations (according to Wind's unanimous expectations, as of September 8, 2023, Sinopharm Group 9x, Runda Medical 17x. (The average value is 12x). Considering that the company is a leader in domestic pharmaceutical business integration and that its industrial and commercial business performance continued to grow rapidly during the reporting period, it was given 15 times PE in 2023, corresponding to the target price of A shares of 21 yuan (original 27 yuan), and the target price of Hong Kong stocks was 23 HKD (exchange rate 1.08), maintaining the “buy” rating.