Key points of investment
Incident: On June 7, 2024, Kunyao Group announced that it intends to sign an equity transfer agreement with the related party China Resources 39 to acquire 51% of the shares of Kunming China Resources Shenghuo Pharmaceutical Co., Ltd. held by China Resources 39 with its own or self-funded capital of RMB 1,791 billion.
The basic situation of China Resources Torch, which is the subject of the merger and acquisition: China Resources Torch's main business is the production and sale of Hesketong softgels (core products), etc. In 2023, China Resources Torch's net assets were 995 million yuan, operating income was 750 million yuan, net profit was 200 million yuan, and the net profit was as high as 27%. The current assessment values correspond to price-earnings ratios of 17.5 times and 3.97 times the net price-earnings ratio, respectively. Relatively comparable companies are within a reasonable valuation range.
With the merger and acquisition of Shenghuo 1+1>2, the core product is expected to become a multi-billion product: China Resources 39 promised to resolve competition issues in the industry when it acquired Kunming Pharmaceutical. At the 2024 Wuzhen Health Conference, the company officially launched the “777” brand. In the future, the company officially launched the “777” brand. In the future, the company officially changed their names to 777 “Lexiwang” and 777 “Luotai” to create the best natural medicine for cardiovascular and cerebral treatment. After the announcement of this acquisition plan, we believe that we can achieve integration at the equity level in the near future, and can contribute to the reporting side in 24 years. In the future, after resolving competition in the industry, Xuesetong Softgel is expected to achieve a 1+1＞2 situation, which can not only increase the market size of Blood Soft, but also hope to draw on the Torchlight experience to increase the net interest rate of Kunyao Pharmaceutical. In the future, Kunming Pharmaceutical and Shenghuo Blood Saitong softgels are expected to rapidly grow into multi-billion-sized varieties.
The “strategic plan” has clear goals, clear business lines, and the right time to rebrand the brand: the “strategic plan” will aim to double revenue by the end of 2028 through endogenous development and extrinsic expansion, reaching 10 billion yuan in industrial revenue, and is committed to becoming the first stock in the Yinfa Health Industry. We estimate the company's 24-28 industrial revenue CAGR to be close to 20% on an industrial scale. The company established three divisions of “1381, 1951, and 777”. 1) “1381” carries Kunming Traditional Chinese Medicine, which has a history of more than 640 years, reshapes cultural brands in multiple dimensions and breaks through terminal coverage. In 2023, it has completed the integration and construction of pharmaceutical sales channels across the country, achieving key control from multi-level channels to focusing on key mainstream customers. 2) “1951” carries serious in-hospital medical products, combines “academic enabling+brand building” to build and enhance the brand value of Kunming Pharmaceutical through academic empowering marketing; 3) “777” carries 37 oral formulations. We expect that by the completion of the company's strategic plan in '28, “Kunming Traditional Chinese Medicine 1381” is expected to grow to a volume of 35-40 billion, “777” is expected to grow to a volume of 3-3.5 billion, and “KPC1951” is expected to grow to a volume of 25-30 billion, corresponding to the 2023-2028 CAGR of 30% +, 30% + 7%, respectively.
Profit forecast and investment rating: Considering that the acquisition plan has not yet been implemented, we maintain the company's 24-26 net profit of 6.1/7.6/970 million yuan, and the current market value corresponds to PE of 26/21/17 times, maintaining a “buy” rating.
Risk warning: Acquisition progress falls short of expectations, brand building falls short of expectations, etc.