Core views

China Resources Shuanghe is a key company in the chemical pharmaceutical sector of China Resources Pharmaceutical Group. Its main business focuses on the fields of large infusions and specialty generic drugs. The acquisition of Zizhu will enrich China Resources Shuanghe's product portfolio for women's health, ophthalmic preparations, and oral medicines, and achieve revenue and profit growth. The acquisition of China Resources Zizhu is an internal business and brand integration of China Resources Pharmaceutical. It is an important step for China Resources Group to integrate the chemical sector's business. The injection of high-quality assets has further enhanced the competitiveness of China Resources Shuanghe Company in the field of chemicals.

occurrences

On February 23, China Resources Shuanghe announced that the company acquired 100% of China Resources Zizhu's shares for 3.115 billion yuan. Compared to the book value of its net assets of 1.15 billion yuan in individual financial statements, the value-added rate was 170.40%. The source of funding for this transaction is the company's own or self-raised funds.

Brief review

Acquire China Resources Zizhu to improve product lines in specialty fields

On February 23, China Resources Shuanghe announced that in order to implement the company's 14th Five-Year Strategic Plan, further enrich the company's specialty product line, improve the product matrix, form a “Women's Health+Pediatrics” specialty product sequence, and enhance brand influence, the company plans to acquire 100% of China Resources Zi's shares held by Beiyao Group. The company purchased 100% of China Resources Zizhu's shares for 3.115 billion yuan. The source of capital for this transaction was the company's own or self-raised capital. This transaction is an important step for the integration of China Resources Group's chemical sector business. By injecting high-quality assets into listed companies and further promoting strategic restructuring and specialized integration, it will enrich China Resources Shuanghe's product line in specialized fields.

China Resources Shuanghe: A pillar enterprise in the pharmaceutical industry, deeply involved in infusions. The fields of chronic diseases and specialists are developing rapidly. China Resources Shuanghe is a pillar enterprise in the domestic pharmaceutical industry and a core chemical drug platform in the field of China Resources Health. The actual controller of the company is Beijing Pharmaceutical Group, with a shareholding ratio of 60.19%. Beijing Pharmaceutical Group is a wholly-owned subsidiary of China Resources Pharmaceutical Co., Ltd., holding shares in more than 20 companies, and has built modern production bases, distribution centers, and high-level research centers. Strong controlling shareholders will bring strong resource advantages to the company, help the company further obtain R&D and distribution resources, and enhance the company's core competitiveness and market influence.

Performance grew steadily and achieved relatively rapid growth in 2023. The company's specialty business continued to rise, and the chronic disease sector maintained a good trend. Revenue CAGR in 2017-2019 was 13.46%, and net profit CAGR was 7.76%. It is expected to achieve operating income of 10.5 billion yuan in 2023, an increase of 11.17% year on year; net profit to mother was 1,342 billion yuan, up 15.33% year on year, and overall performance achieved relatively rapid growth.

Maintain a leading position in the field of infusion, and deepen the field of chronic diseases and specialties. The 2017-2022 annual report and the third quarter of 2023 show that the company's chronic disease business revenue accounts for more than 30% of revenue, and the specialty business also grew from 8.32% in 2017 to 14.98% in 2022. The future of specialty and chronic diseases is critical to increasing the company's profitability.

China Resources Zizhu Pharmaceutical Co., Ltd. is a comprehensive state-owned high-tech pharmaceutical company integrating R&D, production and marketing. Focus on the field of women's health. China Resources Zizhu has a product line of medicines and devices for women's health, oral medicine, ophthalmology medicine, diabetes medicine, raw materials, etc. Among them, reproductive health drugs are the main product lines, which occupy an important position in domestic and foreign markets. The purpose of this transaction is to further enrich the company's specialty product line, improve the product matrix, form a “Women's Health+Pediatrics” specialty product sequence, enhance brand influence, and enhance the company's profitability and overall competitiveness.

In 2022, China Resources Zizhu achieved operating income of 959 million yuan and net profit of 269 million yuan (unaudited); from January to August 2023, it achieved operating income of 706 million yuan and net profit of 282 million yuan (unaudited). Profit is expected to increase rapidly compared to last year. China Resources Zizhu's main source of revenue is the women's health product Yuting (levonorgestrel tablets). According to the Insight database physical pharmacy sales statistics (sample pharmacies are scaled up by coefficient), Yuting's 2022 sales were 860 million, accounting for 89% of China Resources Zizhu's overall sales.

Continued mergers and acquisitions to expand product lines in the non-infusion sector

The epitaxial acquisition is one of China Resources Shuanghe's main strategies. Previously, the company had carried out many mergers and acquisitions to enrich the company's non-infusion sector. In September '23, the company acquired 89.68% of Guizhou Tianan Pharmaceutical's shares for 260 million yuan, further enriching the company's diabetes drug product pipeline. It is expected that in the future, the company will continue to accelerate epitaxial development and expand the company's non-infusion business.

Profit forecasting, valuation and investment recommendations

China Resources Shuanghe is a pillar enterprise in the pharmaceutical sector of China Resources Group. In the domestic field of chemical generic drugs and large infusions, considering the company's brand advantages and rich products, and at the same time, the company is speeding up the deployment of generic drug specialty fields, and epitaxial integration is expected to accelerate in the future. We expect the company's endogenous business revenue in 2023-2025 to be 10.25 billion yuan, 11.30 billion yuan, and 12.42 billion yuan, and net profit to mother will be 1.29 billion yuan, 1.43 billion yuan, and 1.59 billion yuan respectively, corresponding to 15, 14, and 13 times PE, covering for the first time, giving it a “buy” rating.