The strategic plan is clear, and the second half of the year is expected to usher in an inflection point in performance. In the next five years, the company will continue to adhere to the industrial development strategy with traditional Chinese medicine health as its core business, and will focus the company's resources on endogenous growth and integration of epitaxial mergers and acquisitions in all categories of traditional Chinese medicine businesses, with proprietary Chinese medicine and Chinese medicine tablets as the development focus. Affected by changes in the external environment and demand for cold and fever medicine, the company showed a high and low trend during the 2023 quarter. The high pressure situation in Q1 this year has passed, and the performance is expected to improve quarter by quarter.
National reforms are being deepened, and “integration+efficiency improvement” is expected to continue to be realized. It has been three years since the implementation of the company's mixed reform. Through the disposal of inefficient and ineffective assets and the optimization and adjustment of the business structure, the overall operation is now showing a steady and positive trend, and the financial situation has reached the best state in history. Furthermore, the company clearly plans to complete mergers, acquisitions and restructuring projects for 1-2 major Chinese medicine health companies during the “14th Five-Year Plan” period, which is expected to be implemented this year.
Continue to increase brand building and potentially catalyze the basic drug catalogue. The company focuses on its core business and continues to promote large-scale brand projects. In 2023, it sold over 100 million varieties of 17 varieties, including the Enteric Yan Ning series with a scale of nearly 1.3 billion, the “Kangenbei” brand health food of 570 million, and the Golden Flute variety. In addition, there is solid academic research on products such as the “Zhixinping” brand Musk Tongxin Drops, and it is expected to enter the new edition of the basic drug catalogue. The company has a rich product lineup, and is expected to continue to contribute to performance growth, driven by brand strategy.
Emphasis is placed on innovation in traditional Chinese medicine, and R&D investment continues to increase. On April 28, the first Chinese medicine double layer oral patch in China, Kwaishida? Yellow Hollyhock Flower Total Flavonoid Oral Patch was launched. It is a Class 1.2 innovative traditional Chinese medicine drug. It has been included in the 2023 national medical insurance catalogue. The overall size of the domestic oral ulcer drug market is 1.6 billion yuan, and the product has great potential for the future. In addition, the company's Class 2.1 new drug throat cleansing tablets are currently in the registration review stage; the company has also been approved for clinical approval for Class 1.2 of the new traditional Chinese medicine - ivy leaf extract and oral solution, and the innovative results are expected to gradually be implemented. In 2023, the company invested 312 million yuan in R&D, up 18.8% from 2022, accounting for 5.29% of industrial revenue.
Profit forecast and investment rating: The current position is undervalued, and performance is expected to improve quarterly. Combined with potential catalysts such as national reform, quality and efficiency, epitaxial mergers and acquisition+traditional Chinese medicine innovation+entry of basic medicines, the valuation is expected to be further repaired. We expect net profit to be 760, 847, and 935 million yuan respectively in 2024-2026, with increases of 28.5%, 11.4%, and 10.3%, respectively. PE is 17.6x, 15.8x, and 14.3x, respectively, covered for the first time, giving it a “buy” rating.
Risk warning: risk of drug collection, risk of price increase of Chinese herbal medicines, risk of sales falling short of expectations.