Incidents:
On June 7, 2024, the company announced that it intends to sign an equity transfer agreement with China Resources 39 Pharmaceutical Co., Ltd. to acquire 51% of Kunming China Resources Shenghuo Pharmaceutical's shares held by China Resources 39 million yuan. After the transaction is completed, China Resources Torch will become a holding subsidiary of the company and will be included in the scope of the consolidated statement. This acquisition is an important step for the company to achieve 37 business integration. It helps the company to integrate the 37 7 business industry chain and optimize the layout, and can also solve the problem of peer competition with China Resources 39 in Hesetong softgel products.
Comment:
1. China Resources Torch specializes in 37 chronic disease products, and its performance is relatively steady. China Resources Torch was founded in 1995 and acquired by China Resources 39 in 2016. It mainly produces, develops and sells “Lijiao Wang” Hesitong softgels and other general medicine products for chronic diseases. It has a total of 3 holding subsidiaries. It mainly lays out businesses related to the entire 37 7 industry chain, and is highly mature and well-known. At the performance level, in 2023, it achieved operating income of 751 million yuan, an increase of 1.61% year on year; net profit of 203 million yuan, up 0.88% year on year, and the overall operating performance was steady.
2. Monopolize the Xuesaitong softgel market and continue to develop channels outside the hospital. Huesaitong softgels are the core product of the company's 37 oral series. Currently, there are only two manufacturers in the market: the company and China Resources Torch. The total sales volume of this product within and outside the hospital in 2022 exceeded 1 billion yuan. After this acquisition, competition between the company and China Resources Shenghuo in Hesetong softgel products was effectively resolved. The company will monopolize the Hesetong softgel market, which is more conducive to product promotion and accelerated release. Thanks to the fact that in recent years, the company has made every effort to develop channels outside of Huesaitong Softgel through marketing of big brands, etc., and its sales volume increased by 32.60% year-on-year in 2023, achieving a rapid rebound in the face of negative growth in '22. It is expected to accelerate volume in collaboration with China Resources Torch in the future.
3. Seize Yinfa's economic window and build a brand moat for the 37 industry chain. In the context of an aging population and a younger chronic illness, in March 2024, the company and China Resources Torch jointly launched the “777” brand to create a product group with 37 as the core ingredient, and will gradually expand a full range of product lines such as health management, disease prevention, serious medical treatment and post-illness rehabilitation, starting with blood clotting oral products. The “777” brand is an important platform for the company and China Resources 39 to enter the aging industry and chronic disease management. This transaction will leverage the company's collaborative advantages in products, channels, brands, supply chains, etc., enhance the company's business scale in the field of cardiovascular disease treatment, and continue to optimize and enrich the 37 product line, build a 37 industrial chain brand moat, and continue to enhance the company's performance in the field of “Aging Health - Chronic Disease Management”.
Profit forecast: Without considering the impact of this merger and acquisition, we expect the company's 2024-2026 revenue to be 86.31, 95.01, and 10.476 billion yuan, respectively, with year-on-year growth rates of 12.05%, 10.07%, and 10.27% respectively, and net profit to mother of 6.60, 8.82, and 998 million yuan, respectively. The year-on-year growth rates are 48.34%, 33.72%, and 13.11%, respectively. Corresponding to the current PE stock price, it is 23, 18, and 16 times, respectively, to maintain the “Highly Recommended” rating.
Risk warning: goodwill impairment risk, product collection price reduction risk, risk of business integration falling short of expectations, risk of changes in industry policy, risk of raw material price fluctuations, risk of new product development falling short of expectations, risk of market development and brand building falling short of expectations, risk of falling short of expectations in sales of core products, risk of product quality risks, etc.