It is planned to control Huilun Pharmaceutical through the acquisition of shares to deepen the small molecule chemical business layout, which is expected to increase the company's performance

On March 7, the company issued an announcement stating that it is planning to issue shares to some shareholders of Shanghai Huilun Pharmaceutical Co., Ltd. (hereinafter referred to as “Huilun Pharmaceutical”) to purchase part of Huilun Pharmaceutical's shares and establish control over Huilun Pharmaceutical. It is proposed to purchase 85.12% of Huilun Pharmaceutical's shares held by 88 Huilun Pharmaceutical shareholders, including Dong Dalun, Dong Zhu, and Hainan Qianyao, through the issuance of shares. After the transaction is completed, Huilun Pharmaceutical will become a wholly-owned subsidiary of the company.

The acquisition is expected to increase the company's performance, gradually develop and mature Huilun Pharmaceutical's business, and further deepen the company's small-molecule chemical layout. Huilun Pharmaceutical is a chemical company with a combination of small molecule imitation and combination of small molecules, focusing on severe respiratory diseases, tumors, cardiovascular and cerebrovascular diseases. Over the past two years, its research and development results have continued to show, and it has begun large-scale industrial production, and it is expected that it will achieve good development prospects in the future. The company further extended its industrial layout to cutting-edge pharmaceutical fields such as small molecule chemicals, forming a “traditional Chinese medicine-chemical medicine” industrial layout, achieving rich integration of product structures, further expansion in the field of treatment, and upgrading the pipeline of innovative drugs in the future, and accelerating the construction of a leading comprehensive pharmaceutical enterprise. According to the company's announcement, Huilun Pharmaceutical had unaudited revenue of 414 million yuan and net profit of 264 million yuan in 2022; revenue of 998 million yuan and net profit of 31 million yuan in 2023, turning a loss into a profit.

The company continues to enrich product reserves, expand OTC channels, and consolidate core competitiveness

The company's traditional Chinese medicine segment business is mainly engaged in R&D, production and sales of proprietary Chinese medicine products for gynecology, urological diseases and other diseases with complex etiologies. Relying on Guizhou Province's rich Chinese herbal medicine resources and focusing on traditional Chinese medicine research and development innovation, it has now basically formed an industrial pattern of “proprietary Chinese medicines - traditional Chinese medicine granules - ancient classic recipes - small molecule chemicals”.

The company's leading products, Kuntai capsules, Ningbitai capsules, bitter ginseng gel, and Xia hucao oral liquid, are all domestic exclusive patented varieties and medical insurance catalogue varieties. They have remarkable efficacy and high safety. They have been verified by the market for many years, and the competitive pattern is good. The company is actively developing key varieties and expanding superposition channels, and the key varieties are expected to be further expanded.

The company attaches importance to the future development layout of the traditional Chinese medicine industry. In accordance with the R&D requirements of “production generation, reserve generation, and development generation”, the company continues to make research and development reserves for products such as new traditional Chinese medicine drugs, traditional Chinese medicine formula granules, and classic famous recipes. As of 2023H1, the company has 3 new traditional Chinese medicine products under development: Longcen Pelvic Relief granules, Kugor Jieyin gel, and Shuyutong granules; has 445 traditional Chinese medicine formula granules, and has completed a total of 213 national standard and new provincial standard registrations; research and development of 8 classic famous recipes involving gynecology, pediatrics, geriatrics, etc. is also being promoted rapidly; in addition, the company has also initiated research and development of several pharmaceutical-grade health products projects to further expand the R&D network.

After years of accumulation, the company has established a professional, stable and professional marketing team.

Since 2018, the company has vigorously expanded OTC channels. In early 2022, it launched a pilot promotion program for traditional Chinese medicine commercial brands in nine major cities in four provinces. The “Heyan” brand of female reproductive health products, which mainly focuses on Kuntai capsules, has received good market recognition in the retail market outside the hospital, and drug sales through OTC channels have improved markedly.

Profit forecasting and investment advice

Without considering Huilun's merger, we expect the company's revenue in 2023-2025 to be 1,054, 13.45, and 1,616 billion yuan respectively, with net profit of 1.02, 1.33, and 164 million yuan respectively, corresponding EPS being 0.44, 0.58, and 0.71 yuan/share, respectively. The current stock price corresponds to PE 21.8, 16.7, and 13.5 times, respectively. The company is leading in the traditional Chinese medicine segment. The expansion of OTC channels helps accelerate performance. Deepening the layout of the small-molecule chemical industry is expected to increase performance and provide “purchase” ratings.

Risk warning:

Risk of drug development failure; risk of channel promotion falling short of expectations.