The Zhitong Finance App learned that No. 1 Shanghai released a research report stating that it maintains the “buy” rating of Chinese traditional Chinese medicine (00570) and uses DCF as the company to estimate the target price of HK$4.3 (10% discount rate, 3% sustainable growth rate). The company hopes to build a traditional Chinese medicine group with a whole industry chain. Since there is a gap between the current collection of formula particles and expectations in terms of timing and rules, the bank lowered the company's revenue growth expectations and long-term market space.

First, Shanghai's main views are as follows:

Net profit for the first half of '23 +39.9% to 580 million yuan

Due to the low base for the first half of '22, the company's revenue for the first half of '23 rose 57.4% year on year to 9.30 billion yuan, and gross margin increased 1.2 percentage points to 51.1%. In order to strengthen the promotion of national standards and provincial standard products for traditional Chinese medicine formula granules, the company's sales expenses increased by +85.6% year on year to 3.19 billion yuan, and the sales rate increased 5.2 percentage points to 34.3% year on year. Administration and R&D expenses were +15.7% and -1.2% year-on-year to 470 million and 310 million yuan, while management fees and R&D expenses fell 1.8 and 2 percentage points year over year to 5.0% and 3.4%. The company's profit was +46.4% year on year to 620 million yuan, profit margin fell 0.5 percentage points to 6.6% year on year, and profit attributable to shareholders +39.9% to 580 million yuan. The company has cash of $3.98 billion, bank loans and notes of $6.98 billion, and net debt of $3.0 billion.

The structure of each product

(1) Due to the low base for the same period last year, the company's revenue from traditional Chinese medicine formula granules was +78.5% year-on-year to 4.93 billion yuan, and the revenue share increased 6.3 percentage points to 53.0% year on year. Thanks to the recovery in formula granule sales and scale effects, its gross margin increased 2.5 percentage points to 64.1% year on year. (2) During the reporting period, there were more than 1,000 newly developed medical institutions of level 2 and above in the proprietary Chinese medicine business. Proprietary Chinese medicine revenue, which accounted for 21.9% of the company's revenue, was +15.2% year-on-year to 2.03 billion yuan, and gross margin increased slightly by 1.1 percentage points to 59.3%. (3) Thanks to the company's expansion of tablet medical terminal coverage, active deployment of tablet traceability systems and intelligent tablet frying delivery services, the Chinese medicine tablet business revenue, which accounts for 14.0% of revenue, +55.1% to 1.31 billion dollars, and gross margin +2.9 percentage points to 21.9%. (4) Thanks to the increase in the supply capacity of authentic herbal medicines and the development of new customers, the Chinese herbal medicine production and operation revenue, which accounts for 9.5% of the company's revenue, was +104.2% year-on-year to 880 million yuan, and gross margin was +1.6 percentage points to 8.0% year-on-year. (5) Others are the traditional Chinese medicine health industry, which accounts for 1.0% and 0.6% of revenue, and the National Medical Center. As of 23 years, the company has 218 medicinal herb planting bases, involving 87 kinds of medicinal herbs, of which 74 are traceability system varieties.

Collection of tablets and traditional Chinese medicine formulations

Shandong Province is leading 15 provincial tablet procurement alliances to carry out joint procurement of Chinese medicine tablets, involving 21 varieties and 42 product regulations, with a collection scale of 740 million yuan. According to rule settings, the pricing factor accounts for only 15%. The purpose is to “ensure quality, upgrade, and secure supply.” The company's various subsidiaries selected multiple product regulations to further expand scale and sales. In September 23, Shandong formed a procurement alliance for traditional Chinese medicine formula granules with the participation of 15 provinces to collect 200 national standard varieties of traditional Chinese medicine formula granules, organize medical institutions to complete the demand reporting process. The procurement documents were released on September 6. The current rules require a 40% price reduction from the highest effective price to be shortlisted. The collection results are expected to be announced in the fourth quarter. It is expected that the price reduction of formula granules will increase the market penetration rate of this category. The company is expected to be able to achieve price in exchange for volume, and guarantee revenue and profit through large-scale production and intermediate costs.