The chances of getting the “flu medicine king” into the Hong Kong Stock Connect have increased sharply. Is a rebound in Dongyang Changjiang Pharmaceutical (01558)'s stock price imminent?
According to the Zhitong Finance App, as of June 19, it is less than 7 trading days until the end of the Hong Kong Stock Connect review period of the latest round of adjustments, and Dongyang Changjiang Pharmaceutical is expected to enter the Hong Kong Stock Connect list in the latest adjustment with a stable market value.
Judging from the current stock price situation of the company, since May of this year, Dongyangguang Changjiang Pharmaceutical's stock price has adjusted in line with fluctuations in the Hong Kong stock innovative drug sector, and PE valuation is clearly at a historically low level. However, in reality, referring to the 2023 annual report previously disclosed by the company and recent development trends, Dongyangguang Changjiang Pharmaceutical has a strong hematopoietic advantage at the commercial level. Driven by the “king of influenza medicine” Kewei and a rich follow-up product line, the company's fundamentals have shown a clear steady, moderate and positive trend.
What is even more significant is that Dongyangguang Changjiang Pharmaceutical is about to complete an integrated merger with Guangdong Dongyangyang Pharmaceutical to become a comprehensive pharmaceutical company integrating research, production and sales. After entering the Hong Kong Stock Connect, the company is expected to receive southbound capital with steady fundamentals and relatively low valuations, and a stock price rebound is in sight, and this will also be the starting point for it to begin a new round of valuation transition.
Market capitalization is stable, and the possibility of entering the Hong Kong Stock Connect is increasing
For listed companies, the extent to which liquidity supports market capitalization is self-evident. In the Hong Kong stock market, entering Hong Kong Stock Market is the most important way to attract the favor of mainland capital and increase liquidity, especially for innovative pharmaceutical companies with great potential for growth.
As far as Dongyang Changjiang Pharmaceutical is concerned, the company's overall stock price has been rising steadily since October 2021, with a cumulative increase of 149.18%. Currently, the company's Hong Kong stock market value in circulation is HK$5.995 billion.
According to the established logic of the Hong Kong Stock Connect, the Hang Seng Composite Index is regularly reviewed every year at two fixed points in time — June 30 and December 31. As of June 19, it is only 11 days until the end of the Hong Kong Stock Connect review period for the latest round of adjustments. According to the latest data, as of June 19, 2024, if a Hong Kong stock listed company wanted to enter the Hong Kong Stock Connect, the average market value threshold for Hong Kong stocks at the end of the month during the review period was about HK$5.739 billion.
According to the calculation of the Zhitong Finance App, Dongyangguang Changjiang Pharmaceutical's average market value of Hong Kong stocks at the end of the month in the first 11 months of this review period was HK$5.961 billion, which is significantly higher than the current “entry threshold”. Therefore, as long as the company's market value remains around HK$6 billion at the end of June, there is a great opportunity to use the “630” time point to be included in the Hong Kong Stock Connect list.
At the same time, the company has entered the “MACD Gold Fork” stage on the technical side. The stock price is showing an upward trend, and the market value is expected to stabilize. Even based on liquidity testing, the company's average monthly turnover rate for the past 6 months during this review period was 0.28%, and the monthly turnover rate was higher than 0.05%, which also met the liquidity requirements included in the Hong Kong Stock Connect.
In other words, Dongyangguang Changjiang Pharmaceutical has now reached the entry threshold in terms of market value and liquidity, and the regular review at the end of this month will most likely be included in the Hong Kong Stock Connect list.
Generally speaking, the inclusion of a Hong Kong stock listed company on the Hong Kong Stock Connect also means that it has received authoritative certification. If you want to enter the Hong Kong Stock Connect, you need to meet many requirements such as “market value, performance, and liquidity”. There has also always been a saying in the market that “joining the Hong Kong Stock Connect Company is equal to a high-quality company.” However, for high-quality companies such as Dongyangguang Changjiang Pharmaceutical, it is more important that entering the Hong Kong Stock Connect can greatly improve the liquidity of the enterprise.
Taking the results of the regular review at the end of December last year as an example, the Hong Kong Stock Exchange list adjustment officially came into effect on March 4 this year. The data shows that the turnover of the 22 newly included stocks on March 4 increased sharply by 439% compared to before inclusion (average daily turnover from the beginning of 2024 to March 1, 2024). Among them, high-quality companies in the pharmaceutical sector, such as Pharmaceuticals Federation and Columbotai Bio-B, had the highest share price increases, and their trading volume increased markedly. As can also be seen from the brokerage seat, China Investment Information (Shanghai-Hong Kong Stock Connect) and Chuangying Service (Shenzhen-Hong Kong Stock Connect) are the main purchases of related stocks, which also confirms the important role of Hong Kong Stock Connect in improving liquidity.
R&D, production and marketing are being promoted comprehensively, and differentiated innovation ushered in a harvest period
In fact, the reason for actively promoting the “entry” of Dongyang Yangtze Pharmaceutical at this critical time point is to pave the way for Dongyang Pharmaceutical to accelerate the release of intrinsic value after the integration of Dongyang Pharmaceutical.
At the beginning of 2022, Dongyangguang Group proposed development strategic plans and goals for the next five years. Among them, the plan for pharmaceutical assets focuses on the three major fields of infection, chronic diseases, and cancer. The key to taking this step is to further strengthen the company's advantages in integrating R&D, production and marketing.
According to the Zhitong Finance App, Dongyangguang Group currently mainly covers the three major industries of new electronic materials, biomedicine, and health and wellness. Among them, Guangdong Dongyangyang Pharmaceutical is a key subsystem of Dongyangyang Group in the biomedical field, and is also the controlling shareholder of Dongyangyang Changjiang Pharmaceutical. In addition to Dongyangyang Changjiang Pharmaceutical, which targets domestic formulation business, it also includes Dongyang Pharmaceutical Research Institute, which has significant innovative R&D capabilities, and pharmaceutical business for foreign markets.
In Dongyangguang Group's planning, strategic focus will be the key core of the next stage of development. To this end, its pharmaceutical industry will no longer continue the business layout of innovative R&D and independent production and marketing in the past, but will choose to promote the merger between Guangdong Dongyangyang Pharmaceutical and Dongyangyang Changjiang Pharmaceutical.
After the integration, the newly listed company will combine the drug development and overseas sales advantages of Guangdong Dongyangyang Pharmaceutical with the domestic sales advantages of Dongyangyang Changjiang Pharmaceutical to become a comprehensive pharmaceutical company integrating research, production and marketing, further exploiting scale effects and collaborative advantages.
In fact, “practicing internal skills” is also an important part of Dongyang Pharmaceutical's strategic focus. By integrating a new platform for integrating R&D, production and marketing, Dongyang Pharmaceutical will also have a stronger ability to achieve explosive nonlinear growth.
As can be seen from the R&D pipeline, under the logic of transforming technological advantages into market advantages, Dongyang Pharmaceutical is expected to continue to obtain commercial advantages in the product pipeline, which is fundamental to having a large advantage in systematic R&D.
Currently, Dongyang Pharmaceutical has a professional and interdisciplinary R&D team of more than 1,200 people. The company's core R&D team has rich experience and expertise, and has R&D experience covering different stages of the drug development life cycle and enterprise operation management experience. Driven by a strong R&D team, the company has built an independent R&D platform covering the complete life cycle of small and large molecule drugs, including target verification, early detection, pharmaceutical research, pharmacological and toxicological evaluation, clinical research and industrialization.
Relying on this R&D platform, Dongyang Pharmaceutical has more than 100 drugs under development in the R&D pipeline, covering diseases such as infections, chronic diseases, and tumors. Of these, 10 have entered the middle and late clinical stages of clinical phase II and phase III; 4 Phase I clinical trials of Class 1 new drugs have been completed in the US and Australia, and 2 have been certified as orphan drugs by the FDA. Up to now, the company has applied for more than 2,300 invention patents, including 880 overseas. According to the Frost & Sullivan report, the company ranked first among domestic pharmaceutical companies in the number of patents disclosed and authorized announcements in 2014-2023.
Take clifutinib, the core product in the company's anti-tumor pipeline, as an example. According to public information on the market, it is currently the second-generation high-selective FLT3 inhibitor with the fastest progress in domestic production. If it progresses smoothly, it is completely ahead of several other competitors, and is very likely to “exclusively” the market.
It is worth mentioning that Dongyang Pharmaceutical is expected to complete marketing declarations for several new drugs around 2026, and the successive implementation of rich R&D pipelines will also bring new growth points to the company's performance.
In addition to being deeply involved in original research and innovation in many fields, Dongyang Pharmaceutical has also reached strategic cooperation with companies such as Huawei to solve problems such as high technical difficulties, high R&D risks, and long R&D cycles faced in innovative drug development. By building AIDD platform capabilities, Dongyang Pharmaceutical has also reached strategic cooperation and built AI platform technology. The company has successfully obtained the candidate molecule HEC 169584 with AI assistance. It is expected to apply for clinical trials in the second half of this year to help the company achieve a breakthrough in treatment in the field of NASH indications. Furthermore, Dongyang Pharmaceutical continues to iteratively optimize its technology platform and has laid out innovative technologies such as oncolytic viruses, CART, small nucleic acids, PROTAC, and ADC, which greatly empowers innovative drug research and development.
On the production side, Dongyang Pharmaceutical relies on a mature quality management system and sufficient production capacity to ensure rapid implementation of the R&D pipeline, which is also a key advantage that distinguishes it from other innovative pharmaceutical companies. As one of the few pharmaceutical companies in China with a complete production line from APIs to formulations, Dongyang Pharmaceutical currently has leading production plants for chemical solid preparations and biopharmaceuticals in the industry, as well as a production base for a full range of insulin products and the world's largest oseltamivir production base, and has obtained multiple GMP certifications in China, the US and Europe. With large-scale production capabilities that meet international quality standards, Dongyang Pharmaceutical can continue to provide high-quality pharmaceutical products to the market.
On the sales side, Dongyang Pharmaceutical has a marketing team composed of experienced sales professionals and a huge sales and distribution network composed of more than 1,700 professional sales personnel. At present, its distribution network covers more than 2,400 tertiary hospitals in 32 provincial administrative districts and nearly 300 prefecture-level cities in China, as well as more than 8,900 second-level hospitals and more than 65,000 first-level hospitals. Globally, Dongyang Pharmaceutical's sales network covers many countries and regions, including the United States, Germany, the United Kingdom, and Australia. It has long-term sales cooperation with well-known international pharmaceutical companies, and has achieved overseas approval for 70 types of drugs.
At present, strong domestic and international penetration and sales strength have been verified and recognized by the market. This will also provide a strong guarantee for opening up sales space for approved new drugs such as clifutinib in the future, thereby adding strong certainty about revenue growth in the medium to long term after the merger, and driving its valuation to rise further.
Tap the market potential of core varieties and steadily consolidate the basic market
Let's take a look back to Dongyangguang Changjiang Pharmaceutical before the merger. In addition to judging the company's investment in innovative research and development, it is also about observing the company's market share after the efficient transformation of R&D results. The reason why Dongyangguang Changjiang Pharmaceutical is expected to “enter” smoothly this time is that the company's fundamentals are stable.
According to the 2023 financial report previously disclosed by Dongyangguang Changjiang Pharmaceutical, the company recorded revenue of 6.295 billion yuan during the reporting period, an increase of 68.08% over the previous year; the total profit and overall revenue attributable to the company's equity holders was about 1,993 billion yuan, a sharp increase of 2501.23% over the previous year, showing its strong hematopoietic advantage at the commercialization level.
The reason why the company achieved a sharp increase in revenue and profit in 2023 was first due to the strong growth momentum of core products, driven by its advantages in integrated production and marketing.
In fact, behind successful commercialization is actually the victory of major innovative pharmaceutical companies in “systematic competition” in large-scale production, quality control, and marketing sales. As the core product of Dongyangguang Changjiang Pharmaceutical, oseltamivir (Kewei) achieved sales of 5.51 billion yuan, an increase of 78.15% over the previous year.
The key to its excellent performance is that it can flexibly implement reasonable production and marketing arrangements and focus on the children's drug market with a good competitive pattern and price insensitive according to market dynamics. While expanding the accessibility of the Kewei market, it has further consolidated the company's anti-infection and pediatric advantages and stabilized its own moat.
However, in the face of collection, in a situation where market payment capacity tends to be consistent, Dongyangguang Changjiang Pharmaceutical has achieved “expansion and decline” in sales with the strong sales base mentioned above and deep grassroots coverage.
Currently, generic drug collection has become a rapidly growing business segment of Dongyang Pharmaceutical. Currently, Dongyang Pharmaceutical has won the national centralized procurement of 21 drugs, including 5 insulin products, focusing on various treatment fields such as systemic anti-infective drugs, digestive and metabolic drugs, neurological drugs, and cardiovascular and cerebrovascular drugs. In addition, many new and improved drugs are already in phase I and II clinical stages, becoming the key to the collection era after the company broke down.
Furthermore, Dongyang Pharmaceutical has always taken “internal and external training” as the company's development guide. In addition to in-depth development from the main line, Dongyang Pharmaceutical has also made outstanding achievements at the level of foreign cooperation. It is reported that since 2021, the company has completed external licensing of several products and is actively promoting “internal projects to go global”.
Prospects after integration
Through the above analysis and interpretation of Dongyangguang Group's pharmaceutical assets and Dongyangguang Changjiang Pharmaceutical, investors can easily see that Dongyangguang Group's internal pharmaceutical system has an independent research and development system and future rich commercial products. After future integration is completed, its global market size focusing on indications is expected to exceed 100 billion dollars. Relying on a strong R&D, production and marketing system, the company is expected to become a leading pharmaceutical enterprise with a market capitalization of 100 billion dollars.
Looking at the valuation level of the secondary market, with reference to the PE level of comparable companies such as Hanson Pharmaceuticals and China Biopharmaceuticals, etc., estimated at a price-earnings ratio of 20 times, Dongyang Pharmaceutical's Hong Kong stock IPO market value is expected to exceed 40 billion dollars.
From an operational perspective, on the one hand, after integration, Dongyang Pharmaceutical will completely rationalize the business structure of the Group's internal pharmaceutical assets, thereby realizing sales pipelines and production collaboration, opening up domestic and foreign sales pipelines, and sharing supply chain systems and manufacturing bases, thus achieving economies of scale.
At the performance level, Dongyang Pharmaceutical can shorten the business decision-making process and improve overall business performance because integration drastically reduces related transactions and has no competition restrictions in the industry. With sufficient cash flow support from domestic pharmaceutical sales, the progress of the drug pipeline in development will also be further accelerated, making the company's product structure more competitive. The comprehensive and deep industrial synergy effects brought about by this can be further projected into the merged company's financial report, adding a new coordinate point to Dongyang Pharmaceutical's future value curve.