Key points of investment
Currently, the market has some concerns about Tong Ren Tang. We combined the company's historical announcement with the “Tong Ren Tang Investor Relations Activity Record Form” disclosed on May 17 to answer the core questions.
1. In the past, the company only had good growth rates for cardiovascular products. Does the company have the ability to expand other types of products?
The five major OTC key varieties+the Legend Pharmaceutical series are expected to bring new business growth. According to the “Tong Ren Tang Investor Relations Activity Record Form” disclosed by the company on May 17, the company continues to focus and further implement the large variety strategy. On the basis of promoting core varieties such as Angong Niuhuang Pills and Tongren Niuhuang Qingxin Pills, the variety groups were further sorted out and refined, selected more than 50 high-potential varieties, and dynamically adjusted the varieties according to the actual situation in the market. For large products, the company focuses on adopting the following marketing measures to increase product sales:
(1) Increase publicity and promotion efforts: for example, design cartoon IP images for the Wuzi Yanzong series and the Wuji Baifeng series to increase marketing efforts in the subway and media; starting in 2019, launch a five-year advertising plan for five major OTC key varieties, including Wuzi Yanzong Pills, Tongren Wuji Baifeng Pills, Kun Bao Pills, Guogong Liquor, and Suoyang Gujing Pills; (2) Formulated differentiated promotion strategies and launched the Premium Product Code - Imperial Medicine Legend Series:
From the end of 2023 to the beginning of 2024, the joint stock company has launched the Legend of Imperial Medicine series. In the future, depending on market reactions, it will consider launching more Legend Pharmaceutical series; (3) Continue to promote marketing reforms: integrate resources from all parties to form joint efforts to enhance market competitiveness. The company hopes to meet the medication needs of different consumers and provide new choices for a healthy lifestyle by steadily advancing the three major strategies of large variety strategy, boutique strategy, and high-quality development.
The results of the large variety strategy are gradually showing, and the Wuzi Yanzong series is growing rapidly. The company has stepped up its publicity and promotion efforts, broadened e-commerce sales channels, and promoted cooperation on O2O drug purchase scenarios and drug platforms, and accurately targeted consumer groups through hot spots such as Hupu, World Cup, and Asian Games; the sales volume of the Wuzi Yanzong series in 2023 has surpassed the Liuwei Dihuang series and the Jinqu Renqi series, making it the company's third largest single product and the largest supplement product.
2. The company's gross margin of cardiovascular and supplement products all declined in 2023. Will gross margin continue to be under pressure?
The company's gross margin in some categories declined in 2023, mainly due to increased cost-side pressure due to rising raw material prices. The Chinese herbal medicine price index in Chengdu, China has continued to rise since August 2021, and has remained stable at 250-260 since August 2023. Among them, the price of natural beef yolk has increased significantly, from 570,000 yuan/kg at the beginning of '23 to 1.4 million yuan/kg at the end of '23 (data source: Chinese Herbal Medicine World, Anguo Pharmaceutical Market). According to the “Tong Ren Tang Investor Relations Activity Record Form” disclosed by the company on May 17, as a long-standing enterprise in the manufacture of traditional Chinese medicines, the company has an experienced professional procurement team and is reducing operating risks through the following measures: (1) strengthen procurement plans for precious or tight raw materials and make strategic reserves; (2) continue to promote cooperation with source suppliers or enterprises to implement the “true seed, real management” strategy; (3) comprehensively establish a traceability system to ensure the quality of raw materials. At the same time, relevant departments and industry associations are strengthening supervision and strengthening industry standards.
Considering that the Chinese herbal medicine price index in Chengdu, China has been basically stable since August 2023, and that the price of natural beef yolk has stabilized at 1.4 million yuan/kg since November 2023 (data source: Chinese Herbal Medicine Tiandi Network, Anguo Pharmaceutical Market), we expect the company's gross margin to rise steadily with the implementation of the large variety strategy, boutique strategy, and high-quality development strategy.
3. The company's cost rate has always been around 30% since 2018. What is the room for cost reduction and efficiency?
According to the “Tong Ren Tang Investor Relations Activity Record Form” disclosed by the company on May 17, the Beijing Municipal State-owned Assets Administration Commission assessed the company on the basis of the Tong Ren Tang Group as a whole, and there are requirements to improve the ROE assessment. The company continues to deepen reforms to promote cost reduction and efficiency: (1) the industrial side, focusing on the assessment of key indicators related to production, such as product supply rate, production line utilization rate, product quality, etc.; (2) the sales side, focusing on the assessment of sales scale, product promotion, accounts receivable, etc.; (3) Targeted assessment indicators for subsidiary companies according to the business format of different subsidiaries. Overall, through management assessments as a starting point, the quality of the company's work is expected to improve steadily.
The chairman of the company, Mr. Di Shubing, was elected as the chairman of Tongrentang Technology's subsidiary on January 22, 2024. The two companies have established a healthy coordination mechanism to further explore and optimize all-round collaboration. For example, in terms of raw material procurement, scientific research, production and sales, it is possible to strengthen information and resource sharing. For example, products from both sides are displayed simultaneously in retail terminal counters, which can form joint efforts to enhance competitive advantage and improve operational efficiency. Since 23Q1, the company's expense ratio has continued to improve.
4. Do state-owned enterprises have limited incentives for executives?
According to the “Tong Ren Tang Investor Relations Activity Record Form” disclosed by the company on May 17, the company will conduct a comprehensive assessment of the performance and remuneration of executives based on various indicators of production and operation. On the basis of core indicators such as reference income and profit, it will also consider excessive completion and special assessment results, etc., and combine these factors to form a comprehensive assessment system to determine the performance pay of executives after comprehensive evaluation.
Profit forecasting and valuation
We expect 2024-2026 net profit of 19.05/22.08/2,541 billion yuan, an increase of 14.17%/15.90%/15.06% year-on-year, and EPS of 1.39/1.61/1.85 yuan, corresponding to PE32.43x/27.98x/24.32x. The company is an old state-owned Chinese medicine leader. It has the characteristics of “strong brand strength, little adverse effects from policies, and potential power to reform state-owned enterprises”, and maintains a “buy” rating.
Risk warning
Policy adjustment risk, raw material price increase risk, state-owned enterprise reform process falls short of expectations