Incident: 2024. 6.7. The company announced that it plans to sign an equity transfer agreement with the related party China Resources 39 to acquire 51% of China Resources Shenghuo's shares held by China Resources 39 with its own or self-funded capital of 1,791 billion yuan (formerly China Resources 39 holds 100% of the shares). China Resources Torch has a value-added rate of 277.65% compared to the book value of its net assets of 900 million yuan in financial statements. If this 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.
The acquisition of China Resources Torch will strengthen the company's competitiveness in the 37 industrial chain. China Resources Torch was founded in 1995 and became a wholly-owned subsidiary of China Resources 39 in 2016. Its main products are “Lijiao Wang” Xuesetong softgels, xanthine softgels, and silver sulfadiazine cream. China Resources Shenghuo's 3 holding subsidiaries, 1) Kunming Shenghuo Pharmaceutical Co., Ltd. (100% shareholding) mainly provides pharmaceutical marketing services; 2) Yunnan Shenghuo 37 Pharmaceutical Co., Ltd. (100% shareholding) mainly carries out oral 377 total saponins extraction, blood clotting preparations and GSP logistics; 3) China Resources 39 (Yunnan) 37 Industry Development Co., Ltd. (holding 70% shares) mainly develops upstream business in the entire 37 industry chain (planting, seeds, seedlings, etc.); 37 Chinese herbal medicines, 37 saponins, etc. 7. Business related to the industrial chain. In 2023, China Resources Torch achieved operating revenue of 751 million yuan, up 1.61% year on year; net profit of 203 million yuan, up 0.88% year on year. According to the audit assessment, the total book value of China Resources Torch's total assets was 1,067 billion yuan; the book value of total liabilities was 137 million yuan; the book value of net assets was 930 million yuan, and the assessed value of all shareholders' equity was 3,512 billion yuan. The assessed value added 2,582 billion yuan, and the value-added rate was 277.65%.
The acquisition will help the company achieve strategic integration of the 37 7 business, help the company build a benchmark enterprise in the 37 7 industry chain, further increase the market share of the company's products in the cardiovascular and cerebrovascular fields, achieve the company's strategic goal of becoming a “leader in the Yinfa Health Industry, a leader in quality Chinese medicines, and a leader in aging health-chronic disease management”, and solve the industry competition problems of Hesetong Softgels.
Long-term logic: The five-year strategic plan was implemented, and industrial revenue reached 10 billion yuan by the end of 2028. The company formulated a five-year (2024-2028) strategic development plan. Kunyao Group focuses on the two core business areas of premium Chinese medicine and geriatric health—chronic disease management. Through a short, medium-, and long-term three-step development action plan, and endogenous development plus epitaxial expansion, the company strives to double revenue by the end of 2028, and reach 10 billion yuan in industrial revenue, and is committed to becoming the first stock in the Yinfa Health industry.
Investment proposal: The five-year strategic plan has been implemented, and industrial revenue will reach 10 billion yuan by the end of 2028. It is expected that oral products will continue to be released under the power of China Resources 39, and injections will gradually recover their growth rate under policy recovery and volume collection. We expect the company's net profit to be 576/77/1,011 million yuan in 2024-2026, and the current stock price corresponding to 2024-2026 PE is 27/20/15 times, maintaining the “recommended” rating.
Risk warning: the risk that rising raw material prices will affect the gross margin of the product; the risk that exchange rate fluctuations will affect the company's exchange earnings; the risk that downstream demand will not recover as expected; the risk that product sales fall short of expectations; and the risk that R&D progress falls short of expectations.