The company has a long history and continues to deepen the layout of the entire industry chain. The variety of granules in traditional Chinese medicine formulations is advancing rapidly, and the expansion of medical institutions is worth looking forward to. The company has been deeply involved in technology & brand moats for many years and is actively exploring new business growth models.
The company was given a target price of HK$4 for 2023, covered for the first time, and given a “increase in holdings” rating.
It has a long history and continues to deepen the layout of the entire industry chain. China Traditional Chinese Medicine is the core platform for Sinopharm Group to lay out the modern Chinese medicine industry sector. It comprehensively lays out the production and management of traditional Chinese medicine formula granules, proprietary Chinese medicine tablets, Chinese herbal medicines, Chinese herbal medicines, Chinese herbal medicine products, and the National Medical Center (each section achieved revenue of 7.711 billion/3.122 billion/1,933 million/1,273 million/1,273 million/131 million yuan, respectively). The company's performance grew steadily after merging with Tongjitang Pharmaceutical and Tianjiang Pharmaceutical. In 2017-2021, the company's revenue increased from 8.338 billion yuan to 19.53 billion yuan, with a CAGR of 22.95%; net profit for 2017-2021 increased from 1,170 million yuan to 1,933 billion yuan, with a CAGR of 13.36%. In 2022, due to the impact of the conversion of national standards for traditional Chinese medicine formula granules, performance was slightly under pressure. We believe that with the implementation of national standards for traditional Chinese medicine formula granules one after another, the company's performance is expected to return to a rapid growth channel in the future. 2023H1
The variety of granules in traditional Chinese medicine formulations is advancing rapidly, and the expansion of medical institutions is worth looking forward to. According to data from the China Pharmaceutical Industry Information Center, the scale of the Chinese medicine formula granule industry in 2021 is about 25.2 billion yuan, and there is broad scope for development. So far, the National Pharmacopeia Commission has officially issued 265 national standard varieties of traditional Chinese medicine formula granules, and progress in mutual recognition of provincial standards continues to advance. The industry pilot ended in November 2021, and terminals using formula granules were expanded from traditional Chinese medicine hospitals above level II to all medical institutions with traditional Chinese medicine practice qualifications (in 2022, the industry is still affected by the abandonment of corporate standards and the switch between old and new standards). We expect that with the gradual release of national standards and the continuous expansion of medical institutions using them, the industry is expected to grow at an accelerated pace. On August 17, 2023, the Shandong Public Resources Exchange Center issued the “Centralized Procurement Document of the Traditional Chinese Medicine Formulation Granule Procurement Alliance (Draft for Comments)”, which plans to collect 200 varieties. In the medium to long term, industry concentration is expected to continue to increase, and leading formulation companies with two major guarantees of drug quality and supply chain systems are expected to benefit.
Deeply cultivate technology & brand moats, and actively explore new business growth models. The company's R&D center in the field of traditional Chinese medicine has set up 7 national CNAS (China National Accreditation and Certification Supervision Commission) laboratories, 2 national engineering laboratories and 2 national enterprise technology centers. Strong R&D capabilities provide strong support for the company's innovation ability and future development. At the same time, companies in the pharmaceutical industry have inherited many traditional names, including 3 time-honored Chinese brands, 5 well-known trademarks, and 4 intangible cultural heritages. In addition, the company is actively exploring new business growth models, continuously improving the operation system of national medical centers (currently it has 6 national medical clinics), actively developing the three business segments of “special specialties,” “physical therapy and rehabilitation,” and “household health,” and provides differentiated, high-level and high-quality comprehensive TCM medical services. The medium- to long-term National Medical Center is expected to be closely linked with other business sectors, constructing a closed-loop development model for the traditional Chinese medicine health industry, and deepening exploration of commercial value.
Risk factors: the introduction of national standard varieties of formula granules falls short of expectations; health insurance policies fall short of expectations; risk of industry competition; risk of weak market demand; risk of declining profitability.
Profit forecast, valuation and rating: The company is the core platform for Sinopharm Group to lay out the modern Chinese medicine industry sector. We predict that the company's net profit for 2023-2025 will be 1,186 million/1,496 million/1,927 billion yuan respectively, corresponding to diluted earnings per share of 0.24/0.30/0.38 yuan. Referring to the valuation levels of comparable companies Hongri Pharmaceutical and China Resources 39 (average PE14x in 2023, all agreed by Wind), we think it is reasonable to give the company 14X PE in 2023. The corresponding market value is RMB 16.6 billion (HK$20.3 billion), and the corresponding target price is HK$4. Covered for the first time, giving it an “increase in holdings” rating.