Sinopharm Hyundai is a chemical industry platform under the Sinopharm Group. After years of development and integration, it has formed a powerful chemical platform industrial enterprise integrating intermediate API formulations. We believe that there is room for improvement in the current profit level of the company, and the profit side is expected to accelerate growth with the help of central enterprises to improve quality and efficiency.

(1) Formulation business: Generic drug collection price reduction pressure is gradually slowing down, and refined narcotic preparations are the highlight of growth. The company's pharmaceutical business generated revenue of 6.834 billion yuan in 2023, accounting for 56.62% of revenue, mainly anti-infective, cardiovascular, urogenital, neuroanesthetic, skeletal muscle, digestive and metabolic products.

Since 2018, domestic generic drug collection prices have been reduced, and the company's main products such as cefixime and nifedipine controlled-release tablets have kept the total volume of the company's formulations at 68-8.1 billion from 2018 to 2023, and the gross margin dropped from 65.12% to 50.33%. At the same time, the company's overall sales expenses rate fell from 29.6% in 2019 to 17.84% in 2023, and profits remained stable overall under the pressure of the price reduction. We believe that benefiting from the rapid growth of refined narcotics such as remifentanil and milnapram hydrochloride tablets, the formulation business is expected to stabilize.

(2) In the upstream intermediate API business, the competitive pattern for anti-infective intermediate APIs is good, and profitability is expected to increase, and reproductive specialty APIs are growing steadily: ① The wholly-owned subsidiary Sinopharm Vikida specializes in anti-infective API intermediates 6-APA, clavulanic acid, amoxicillin and other anti-infective drugs. The overall sales volume of major products has remained stable in recent years, and the main product companies have had the highest market share. Among them, the market prices of products such as 6-APA, amoxicillin, and azithromycin have continued to rise since 2019. We believe that the market prices of products such as 6-APA, amoxicillin, and azithromycin have continued to rise since 2019. Eliminated, currently basic A stable competitive pattern of few oligarchs has formed, and the price system is expected to maintain the current dynamic balance. For example, 6-APA has formed a three-oligarchy competition pattern. The price continues to rise from the lowest price of 145 yuan/kg in 2019 to a maximum of 390 yuan/kg by the end of 2022. The latest price in March 2024 is 330 yuan/kg. Sinopharm Wichida turned a loss into a profit in 2022, with a profit of 179 million yuan in 2023. We believe that subsequent profitability is expected to gradually increase; ③ The holding subsidiary Shanghai Tianwei specializes in assisted reproduction specialty APIs, and achieved revenue of 548 million yuan and net profit of 223 million yuan in 2023. Profitability is outstanding, and is expected to grow steadily.

(3) Major shareholders participate in the issuance of large amounts of capital, and the increase in executive holdings shows confidence in development. Abundant cash on the account is conducive to business development and extended mergers and acquisitions. The majority shareholders participated in the issuance of 1.2 billion dollars in 2023. The company has plenty of cash on its account. Southwest Pharmaceutical (a subsidiary of Taiji Group) and Sinopharm Guorui Pharmaceutical (a subsidiary of Sinopharm Co., Ltd.) specialize in chemical preparations. We believe that Sinopharm Group is expected to promote asset restructuring and sorting out. ④ The reform mechanism of central enterprises has been clarified. Since 2022Q3, company management has been replaced one after another. Under the “one profit and five rate” assessment requirements of state-owned enterprises, it is expected to revitalize the organization and intensify team enthusiasm and enhance the company's profitability; ⑤ In 2023, the company withheld 683 million non-profit (yoy +24%), with a net interest rate of 7.99%, which is lower than the average of 15.37% of similar listed companies in the pharmaceutical industry, and there is room for improvement in profitability.

Profit forecast and investment rating: We expect the company to achieve net profit of 991 million yuan, 1,153 billion yuan, and 1,357 billion yuan in 2024-2026, with year-on-year increases of 43.2%, 16.3%, and 17.7%, respectively, corresponding to the current stock price PE of 14, 12, and 11 times, respectively. The company's current valuation is lower than the average of similar companies in the industry. It was covered for the first time, and a “buy” rating was given.

Risk warning: The risk of market development falling short of expectations, the risk of policy changes, the risk of a sharp drop in product prices due to market competition, and the risk of raw material price fluctuations affecting profitability.