The short-term performance of the main business and Huayuan Pharmaceutical is under pressure. Recently, the company announced its 2023 performance forecast. Net profit due to mother is expected to reach 180 million yuan to 220 million yuan, a year-on-year decrease of 53.09%-42.67%; deducted non-net profit will reach 133 million to 173 million yuan, a year-on-year decrease of 61.84%-50.37%. The decline in the company's performance is mainly due to: 1) the market price of vitamin D3 continues to decline due to downstream demand in the industry; 2) the pharmaceutical sector is affected by collection, and although the number of provinces selected for generic drug collection has increased, the selected price has dropped sharply; 3) In terms of costs, it is mainly affected by the increase in share payment fees, fixed asset depreciation, and R&D investment confirmed in the current period of the employee shareholding plan implemented in 2022.

The vitamin sector has basically completed the “vertical” layout of the entire vitamin D3 industry chain, and has the advantage of upstream and downstream integration. “Vertical” field: Based on vitamin D3 products, the company develops cholesterol and refined lanolin in upstream raw materials and gradually intervenes in the field of cosmetic raw materials; in downstream applications, it develops 25-hydroxyvitamin D3 and active vitamin D3 series drugs and enters the field of pharmaceuticals and health products. The company has become the world's largest production base for four major products: lanolin cholesterol, vitamin D3, 25-hydroxyvitamin D3, and refined lanolin. “Horizontal” field: The company is actively exploring the expansion of other vitamin products. The construction of the company's new vitamin products VA, VE, VB6, biotin, etc., and the qualifications and permits required for the project are progressing in an orderly manner. We believe that the company's “one vertical, one horizontal” strategic advantage is remarkable, and the long-term growth path is clear.

The pharmaceutical sector actively promotes research and development of high-end generic drugs, opening up room for long-term growth for the company. In 2023, the company actively responded to collection and completed the renewal of the bid for valsartan amlodipine tablets and doxofylline injections; the ninth batch of the new product omeprazole bicarbonate capsules was selected. In addition, the company is steadily advancing research and development of new products, and dopazezide tablets became the first company in China to pass a consistent evaluation. This product is mainly used to treat Parkinson's disease and symptomatic Parkinson's syndrome, and is expected to have great potential for future release. We believe that as the company expands its new drug cluster, it is expected to add new profit growth points to the company and open up the growth ceiling for the original cycle products.

Due to sluggish downstream demand, VD3 prices and sales volume declined, as drug prices declined due to collection; due to increased expenses such as depreciation of fixed assets and share payments, the company's corresponding expenses were raised. The estimated 2023-2024 earnings per share were 0.38 yuan and 0.54 yuan per share (the original forecast values were 1.22 and 1.53 yuan), respectively, adding 0.63 yuan per share in 2025. According to comparable companies, the company was given a price-earnings ratio of 16 times in 2024, and the corresponding target price was 8.64 yuan. The rating was adjusted to “gain weight” due to factors such as VD3 and pressure on the performance of the pharmaceutical sector.

Risk warning

The risk of vitamin D3 price fluctuations, the risk that the company's production capacity release falls short of expectations, the risk of centralized drug procurement price reduction, and the risk of not being selected.