Investment highlights:
Overview: Former state-owned real estate enterprise in Shandong, divested real estate business to focus on the health industry. Earlier, the company was a real estate enterprise under the Shandong Provincial State-owned Assets Administration Commission. In 2018, it acquired Shandong Freda Pharmaceutical Group Co., Ltd. and implemented a “real estate+healthcare” development model. In 2023, the company set up a real estate business, focusing on the health industry. Currently, the company's main business is cosmetics, pharmaceuticals and raw materials. In 2023, the company's cosmetics, pharmaceuticals, raw materials and additives accounted for 52.76%/11.35%/7.67% of revenue, respectively.
Cosmetics business: The brand strategy was upgraded to “5+N”, laying out a new ecosystem of “natural beauty+medical beauty”. The company's cosmetics business is mainly carried out through Freda Biotech Co., Ltd. Currently, it has many brands with different positions such as Yilian, Dr. Earl, Shanyan, Iparhan, UMT, Qian Run, and Beyrun. Among them, Yilian and Dr. Aier are the two main brands, with impressive revenue growth in recent years. Yi Lian focuses on “hyaluronic acid moisturizing skin care” to continuously strengthen the brand mentality; Dr. Eyre's brand upgrades flash lotion and continues to increase the sales share of high-margin products such as wake-up essence and flash products, and the gross margin is expected to increase further.
In 2023, the company launched the medical beauty brand “KeyC” and entered the high-growth collagen medical beauty circuit, which is expected to create a second growth curve in the future.
Raw materials business: Steady business development and active development of applications in various fields. The company's raw materials business is developing steadily. The raw material business revenue CAGR in 2018-2023 was 40.99%, and production capacity expanded after the acquisition of Focus Biotech. Recently, the company actively adjusted Freda's sales strategy to increase the sales share of cosmetic grade hyaluronic acid with high gross margin, explore overseas markets, and expand the application of hyaluronic acid in the fields of medicine, aesthetics, tissues, and care.
Pharmaceutical business: multi-field layout, online+offline omnichannel model. The company's pharmaceutical division owns many well-known brands such as Spete, neck pain granules, and pediatric antidepressants. 2024Q1, the company's pharmaceutical sector's revenue was -23.25% year-on-year, mainly due to the high base of 23Q1 emergency insurance products and 24Q1 business adjustments. As the pharmaceutical business gradually opens up online product links and the end of business adjustments, it is expected that the pharmaceutical business will return to an upward channel.
Profit forecast and investment suggestions: The company focuses on the big health industry, and the cosmetics business brand strategy has been upgraded to “5+N”. The revenue of the main brands, Yilian and Dr. Aier, continued to grow well, and launched new brands to enter the collagen medical and aesthetic circuit in 2023; the raw materials business adjusts sales strategies and actively explores overseas markets and applications in various fields, and is expected to continue to grow steadily in the future; the pharmaceutical business is expected to return to an upward channel with the opening of online product links and the end of future business adjustments. We expect the company's 2024-2026 EPS to be 0.34/0.42/0.52 yuan/share, respectively, and the PE corresponding to the stock price on June 17, 2024 will be 22/18/15 times, respectively. For the first time, coverage will give an “gain” rating.
Risk factors: Risk that macroeconomic recovery falls short of expectations, risk of industry competition intensifying risk, risk of channel expansion falling short of expectations, risk of brand category expansion falling short of expectations.