Investment highlights

For the first time, China Resources Shuanghe (600062) was covered to give it an outperforming industry rating. The target price was 23.00 yuan, corresponding to the 2024 valuation 15.4 times P/E. The company is one of China Resources Group's big health business units.

The reasons are as follows:

Chronic diseases+specialty+infusion business platform. The company has a rich chemical product matrix. The company is positioned as a chronic disease, specialty and infusion business platform. The product line covers many fields, and has 1.8 billion yuan of products in 2022.

Among them, the exclusive product No. 0 in the field of antihypertensive has been selling well for many years, and the core pediatric product pediatric compound amino acid injection (19AA-I) has the largest market share (1-3Q23 is 85.7%). The company officially joined China Resources Group in 2010, and its profitability and operating quality continued to improve under its empowerment. The company launched an equity incentive plan at the end of 2021, which we believe shows the company's confidence in future growth.

Upgrade the intelligent manufacturing base and actively transform the three core businesses. In recent years, the company has upgraded China Resources Secco's factories. Currently, it has 19 production bases across the country. Through cost reduction and efficiency, profit margins have increased steadily, and the net profit margin in 2022 increased 2.0pp to 12.3% year-on-year. With 2017-9M23, the company's infusion business revenue share decreased by 3.8 pp. In the future, it plans to further innovate and transform to increase the share of high-gross businesses such as BFS; the chronic disease business revenue share decreased by 6.9pp. The company plans to actively embrace volume procurement and continue to increase chronic disease products; the specialty business revenue share increased by 6.4 pp. The company plans to gradually expand its business area, making it an important driving force for medium- to long-term growth.

Active mergers and acquisitions improve product pipelines, and further strengthen internationalization and innovation transformation. The company relies on epitaxial mergers and acquisitions to continue to develop new businesses. Since the 14th Five-Year Plan, it has expanded products in the fields of peptides, biological fermentation, and diabetes through acquisitions such as Pai Peptide Biotech, Shenzhou Biotech, and Tianan Pharmaceutical. The company recently announced its intention to acquire China Resources Zizhu, and we believe it is expected to further supplement the specialty business product line. The company develops high-potential targets and differentiated generic drugs with technical barriers in the fields of oncology, pediatrics, rare diseases, etc. The CX2101 project and the DC05F01 project have all completed phase I clinical main trials.

Furthermore, the subsidiary China Resources Secco and Tiandong Pharmaceuticals is an international pharmaceutical company certified by both the US and the European Union.

What is our biggest difference from the market? Compared to the market, we are optimistic that the company will continue to improve endogenous management efficiency in the future, and help steady growth in performance through continuous strengthening of mergers and acquisitions and BD's rich product portfolio.

Potential catalysts: The progress of mergers and acquisitions has accelerated, and the progress of product BD has accelerated.

Profit forecasting and valuation

We expect the company's 2023-25 EPS to be 1.23/1.49/1.71 yuan, respectively, and a CAGR of 18.0%.

The current price is 15.7/13.0/11.3 times the 2023-25 P/E, respectively. For the first time, we covered China Resources Shuanghe and gave it a “outperforming industry” rating. The target price is 23 yuan, which has room for an increase of 18.9% compared to the current stock price.

risks

The impact of the policy on product prices exceeded expectations, R&D progress fell short of expectations, and the competitive landscape deteriorated.