The mixed reform of state-owned enterprises has already paid off, and the difficult situation has been reversed and a period of steady growth has begun. Kangenbei focuses on the medical and health sector, mainly engaged in R&D, manufacturing and sales of pharmaceuticals and health products. It has expanded related business areas through mergers and acquisitions, causing the company's performance to fluctuate greatly since 2019. Since implementing the mixed reform, the company has focused on traditional Chinese medicine health development strategies and continued to promote resource integration and collaborative work: on the one hand, the company promotes the disposal of unadvantageous, inefficient and ineffective assets of the non-main business; on the other hand, the company promotes business integration to promote the upgrading, transformation and innovation of the traditional Chinese medicine health industry. In 2023, the company's performance has basically returned to its highest level in history, achieving operating income of 6.733 billion yuan (+12.20%) and net profit of 554 million yuan (+14.60%) after deducting non-return to mother. We believe that the current risk factors for the company's profit reduction have basically been clarified, the business structure continues to be optimized, and the profit of the main business has entered a stable stage.

Renew and expand old brands, innovate and cultivate new brands. The company adheres to the industrial development strategy of the core business of traditional Chinese medicine and the “two wings in one” product business position with all categories of traditional Chinese medicine products as the main body, specialty chemicals and specialty health consumer products as the two wings. The company focuses on brand building in business development. At present, it has cultivated and formed several well-known brands and their series of products, forming a brand forest strategy. In 2023, the company sold 17 product series worth over 100 million yuan, an increase of 2 over the previous year, achieving a total sales revenue of 4.619 billion yuan (+12.93%), accounting for 68.6% of the company's total revenue. The company will build an excellent product matrix. In addition to continuing to consolidate the 1 billion sales scale of the Conn Bay Entering Series, the company will strive to achieve sales levels 5-10 billion for 2 brand series products and 200-500 million for 5-6 products. At the same time, by increasing brand extension, brands and products will be developed from disease treatment to health care prevention.

Endogenous and extrinsic extensions work together to integrate resources and improve efficiency. On the endogenous side, the company will further promote work such as disposal of invalid assets and full ownership of holding subsidiaries, integrate resources, improve quality and efficiency, and at the same time increase investment in R&D around the main line of innovation, focus on innovative research on key projects and secondary development and evidence-based medical research on major varieties of traditional Chinese medicine, and strengthen the construction of R&D and innovation platforms. In terms of extension, according to the strategic plan, the company will actively seek mergers and acquisitions in large traditional Chinese medicine health enterprises, while focusing on superior treatment fields and segments, and introducing high-potential varieties with clinical value and market demand.

Profit forecast: We expect the company's net profit to be 747 million yuan, 837 million yuan, and 956 million yuan respectively for 2024-2026, corresponding to EPS of 0.29 yuan, 0.33 yuan, and 0.37 yuan respectively. The company optimizes assets, improves quality and efficiency through “slimming down and strengthening” actions, and has grown steadily under the impetus of major brands and large-scale projects.

Referring to comparable companies, we gave the company 20-25X PE in 2024, with a corresponding reasonable value range of 5.81-7.27 yuan. For the first time, we covered it and gave it a “superior to the market” rating.

Risk warning: the risk of changes in industry policies, the risk of R&D innovation, the risk of price fluctuations of raw materials, and the risk of increased market competition.