Key points of investment:

Root fungus fermentation technology creates the Wuling series product matrix: Zolite was founded in 2000 to produce traditional Chinese medicine products based on medicinal fungal biological fermentation technology. The core products include Wuling capsules, Lingze tablets, and Bering tablets. As a kidney tonic and sedative, Wuling capsules can be used for insomnia and amnesia caused by heart and kidney failure. It is also the first Chinese medicine product proposed in China to treat mild to moderate mental disorders and improve mood.

The secondary development of Wuling capsules broke through the field of application of the original product: in addition to the field of kidney supplementation and peace of mind, the company is actively exploring the therapeutic uses of Wuling capsules in other fields. In treatment research in the field of Alzheimer's disease, the expert team has discovered interactions between Wuling capsules and multiple AD treatment targets, further indicating that Wuling capsules may be an effective proprietary Chinese medicine for Alzheimer's disease. Wuling capsules still have huge potential for development, and the market space needs to be further explored and developed.

Bailing capsules were approved for marketing and reshaping the Bailing series to become the company's second growth curve: in December 2023, another of the company's core varieties, Bailing capsules, was approved, becoming the first homologous drug of the same name approved in China after the implementation of the new “Special Regulations on the Registration and Administration of Traditional Chinese Medicine”.

According to Minei data, domestic sales of Bailing capsules reached 2.3 billion yuan in 2022. The company is expected to reshape the growth curve of the Bering series through subsequent volumes of Bering capsules to make up for the previous decline in revenue due to the collection of Bering tablets.

Rate optimization, improving operational efficiency, and continuing to increase company profits: The company has continued to improve operational efficiency and optimize the sales architecture in recent years. The 23Q1-3 sales expense ratio was 40.8%, down 5.2% year on year in 2022. In the future, the company is expected to further reduce sales expenses and increase profit margins by digging deeper into the existing product market space and starting sales volume of Bailing capsules in 2024.

Profit prediction and valuation: The company's Wuling series products have long been in a leading position in the market in the field of kidney supplementation and relaxation, and Bailing capsules were approved to shape the company's second growth curve. We expect the company to achieve operating income of 19.4/23.9/2.93 billion yuan from 2023 to 2025, up 7.6%/23.1%/22.4% year on year, and achieve net profit of 3.9/4.85/60 billion yuan, up 42.7%/24.5%/23.1% year on year, corresponding to the current PE stock price valuation of 19x/16x/13x. Corresponding to the predicted PE of the comparable company in 2024, the company is expected to achieve net profit of 485 million yuan in 2024. According to the relative valuation method, the company's target market value is 9.4 billion yuan, giving it a “buy” rating for the first time.

Risk warning: risk of price reduction in collection, risk of sales of new products falling short of expectations, risk of litigation.