The company is a key chemical platform enterprise in the pharmaceutical sector of China Resources Group. It actively lays out four major business platforms: generic drug business, infusion business, differentiated drug business, and innovative drug business. In the infusion business, with the recovery of demand for diagnosis and treatment, the company's profitability has gradually improved through the restructuring of packaging materials; in the non-infusion business, the company mainly covers chronic disease business and specialist business, with 18 products sold over 100 million dollars. At the same time, the company is committed to R&D transformation to accelerate the development of epitaxial development. Considering the company's rich product line and brand advantages, channel and terminal coverage and management capabilities, the company was given 20 times PE in 2023, with a target market value of 26.572 billion yuan, corresponding to the target price of 26 yuan, coverage for the first time, and a “buy” rating.

The company is a pillar enterprise of China Resources Group's chemical drug platform in the pharmaceutical sector. At present, the company has set up three major business platforms: general medicine business for chronic diseases, specialty business, and infusion business. Its main business covers new drug research and development, pharmaceutical production, drug sales, API production and pharmaceutical equipment. It has rich product lines and brand advantages, high-quality product quality and cost control, strong channel and terminal coverage and management capabilities, and international advantages. At present, the company has 21 subsidiaries and more than 11,000 employees. It has well-known Chinese trademarks such as “Shuanghe and Tu,” “Secco,” and “Xiangzhong,” and has won many honors such as “Top 100 Chinese Chemical Pharmaceutical Companies”. At the same time, the company has 1.8 billion yuan of products, and has formed a competitive product group in the market.

In the infusion business, the company is expected to maintain stable profitability in the increasingly competitive infusion market, relying on product structure transformation, forming stable cooperative relationships with hospital customers, and achieving cost reduction and efficiency by improving the level of automation of production lines. The company has various types of infusion products, including basic infusions, therapeutic infusions, and nutritional infusions, etc., with complete packaging forms. Among them, the next-generation infusion product, encapsulated polypropylene infusion (BFS), has had a strong response in the industry due to its advantages such as few insoluble particles, good sterility, and the strictest endotoxin standards, etc., which is an important sign that the company is leading the safety upgrade of infusion products. The company's infusion business accounts for about 30% of revenue and has strong channel advantages. It has more than 2,000 commercial customers across the country, and terminals cover 31 provinces and cities across the country. The company focuses on market growth and development of infusion bases, accelerates product structure enrichment and supplements, resumes production of sleeping products, and tightens product restructuring. By increasing the proportion of high-margin products such as therapeutic infusions and nutritional infusions, the company hedges the cost increase caused by increased competition; at the same time, the company focuses on the four major bases of Wuhu, Wuhan, Xi'an and Pingdingshan to reduce costs and increase efficiency, and build a low-cost, large-scale infusion production base. We believe that product structure transformation and cost reduction and efficiency will help increase the company's market share, and the profit level of the infusion business is expected to stabilize.

The non-infusion business mainly covers chronic disease business and specialty business, with 18 products sold over 100 million dollars. The chronic disease business accounts for about 33% of total revenue, and is the largest business segment. It has many well-known products such as No. 0, Glucopin, and Pivastatin. Among them, the core product No. 0 is a widely used classic compound antihypertensive product; the specialty business focuses on pediatrics, nephrology, mental/neurological, narcotic analgesia, and anticoagulant fields, and various products rank in the top three market shares. Currently, the company's non-infusion business has more than 2,000 commercial customers across the country, covering hospitals, urban community centers/sites and rural primary care terminals, more than 200,000 pharmacies, and cooperating with more than 100 top 100 pharmacy chains. It has the ability to collect and market products at low cost. We believe that our strong channel advantages and brand advantages are expected to continue to strengthen the company's product competitiveness.

Firmly transform R&D and accelerate the development of epitaxial development. The company focuses on national needs, cutting-edge technology, clinical needs and enterprise needs, continuously improves shared services, and accelerates the layout of technology platforms and innovative targets. The R&D expenditure for the first three quarters of 2023 was 380 million yuan, an increase of 19.65% over the previous year, and the 2018-2022 R&D expenditure CAGR was 26.79%; in 2022, the company had 807 R&D personnel, accounting for 6.83% of R&D personnel, an increase of 22.27% over the previous year.

At the same time, the company accelerated epitaxial development. In 2023, the company acquired 89.681% of Tianan Pharmaceutical's shares to enrich the company's diabetes drug product pipeline; in August 2022, the company announced the acquisition of 50.11% of Shenzhou Biotech's shares to quickly enter the field of biofermentation. At the same time, the company further acquired 31.25% of Tiandong Pharmaceutical's shares to achieve 70% ownership of Tiandong Pharmaceutical to better integrate the company's resources and achieve better development in the field of heparin anticoagulant. In terms of BD, in 2022, the company completed the establishment of 2 projects and the signing of 4 projects. The company continues to accelerate project sourcing and improve the efficiency of BD product introduction in order to lay out new growth points and extend the industrial chain.

Risk factors: market competition risk; industry policy change risk; risk of sharp decline in product prices; risk of new drug development; geopolitical risk.

Profit forecasting, valuation and rating: The company is a key chemical platform enterprise in the pharmaceutical sector of China Resources Group, and actively lays out four major business platforms: generic drug business, infusion business, differentiated drug business, and innovative drug business. In the infusion business, with the recovery of demand for diagnosis and treatment, the company's profitability has gradually improved through the restructuring of packaging materials; in the non-infusion business, the company mainly covers chronic disease business and specialist business, with 18 products sold over 100 million dollars. At the same time, the company is committed to R&D transformation and accelerated external development. In summary, we expect the company's EPS for 2023-2025 to be 1.29/1.56/1.82 yuan, and the current price corresponding to PE valuation is 14/11/10 times. Considering that the company has a rich product line and brand advantages, as well as channel and terminal coverage and management capabilities, we gave the company a target price of 26 yuan for 2023, covering the first time, and giving it a “buy” rating.