The real estate divestment has been successfully transformed, and it has the advantages of the entire health industry chain. The company successfully completed the divestment of the real estate business in '23, and will focus on the three major businesses of cosmetics, pharmaceuticals and raw materials in the future. The company is backed by the Shandong State-owned Assets Administration Commission and has abundant production and research resources. It has various health industry chain clusters such as hyaluronic acid raw material bases and biomedical industrial parks. It has a full industry chain layout from raw materials, production, brands and channels, and has remarkable collaborative advantages in various businesses. In October '23, the company completed the restructuring of core executives. The new team has extensive experience in the health industry, helping the company transform into the health sector.

Cosmetics: The “5+N” brand matrix was formed, and hyaluronic acid+microecological skincare blossomed. The company relies on raw materials, technology and patent advantages to create a differentiated brand matrix, and has formed a “5+N” brand matrix with major brands such as Yilian and Dr. Aier plus multi-ingredient and skincare technology. In '23, the company's cosmetics revenue was 2.42 billion yuan, of which Yilian and Dr. Earle accounted for 35.5% and 55.8% respectively. Dr. Ayr: A leader in “microecological skincare”, star products have been launched one after another. At present, two major product lines, probiotic+ and flash charging, have been formed, and are continuously upgraded, while supplementing anti-oxidant and other effective categories to expand the “microbiology+” mentality. Yilian: Focusing on the mentality of “hyaluronic acid moisturizing skin care”, the hyaluronic acid ingredient has been iterated seven times. The company successfully created a single-product hydrating spray, leading the spray market; at the same time, it continued to expand the range. The second product echelon, the Moisturizing Series broke the circle with “China High Moisturizing”, expanding from spray to higher value-added categories, opening up room for growth. The company has a keen insight into consumer demand and innovates marketing, holds marketing activities such as “spray festivals” and joint events to increase exposure, and achieve both brand volume and product sales. At the same time, full offline efforts began in '23 to seize opportunities for the transformation of offline beauty retail.

Entering collagen medicine and beauty creates a second curve and upgrades the new ecosystem of “raw beauty+medical beauty”. The brand “Cosmic” was launched in '23 to create differentiated products with recombinant collagen+hyaluronic acid. The company has been deeply involved in recombinant collagen for many years, forming a complete industrial chain from raw materials, product development, channels, and brand promotion. The collagen base has completed trial production in 23 years, and has obtained medical device registration certificates for sodium hyaluronate nursing solution (Class II) and Class II and Class III medical device business qualifications. Currently, recombinant collagen skincare products are still in the early stages of penetration (15% penetration rate in 21 years). The company's industrial chain is gradually improving, and the group's collaborative advantages are remarkable, and it is expected that Dongfeng in the medical and aesthetic market will use Dongfeng to create a second growth curve.

Ingredients: The world's leading manufacturer of hyaluronic acid raw materials. The subsidiary focuses on Freda's products covering the fields of medicine, food and cosmetics, and its customers cover more than 70 countries and regions around the world. Since 21 years, the raw materials market has lagged behind due to demand from the downstream sector. The company actively adjusted sales strategies, developed overseas markets and new application products, and achieved rapid growth in the raw materials business (+23% year-on-year revenue in 23).

Pharmaceuticals: The company's pharmaceutical business includes traditional Chinese medicine, chemical preparations, etc. The subsidiary Akihito Freda has well-known products such as Akiren's neck pain and pediatric antidepressants. The research and application technology of the participating company Dr. Renfreda sodium hyaluronate series products has reached the international advanced level. The company is building an online+offline omnichannel model, focusing on maintaining share+increasing the offline hospital and pharmacy channels, exploring new models of pharmaceutical e-commerce online, and providing multi-channel strategic cooperation.

Investment advice: Users of the company's two main cosmetics brands are mature, have clear product line plans, continuous upgrading and promotion, and actively explore categories. The pharmaceutical business is expected to maintain steady growth as the impact of policies and changes in raw material prices is gradually digested and superimposed and actively exploited channels. Raw materials and additives business companies actively explore the market, break through high value-added products, and open up room for growth. We expect the company to achieve net profit of 3.7/50/ 650 million yuan in 24-26, corresponding to a year-on-year growth rate of 21.7%/36.2%/28.2%; referring to comparable company valuations, the company will be given a 24-year 30X PE with a target price of 10.9 yuan. For the first time coverage, we will give it a “recommended” rating.

Risk warning: The macroeconomy is weak, industry competition intensifies, and new product launch performance falls short of expectations