Event: On June 22, 2024, the Academic Symposium on Chronic Disease Management and the Member Congress of the Chinese Society of Gerontology and Geriatrics Management Branch were successfully held in Beijing. As co-organizers of this conference, KPC Group and China Resources Torch participated actively and fully supported. The conference held in-depth discussions on the development of the silver hair health industry and improving the quality of services for the management of chronic diseases in the elderly.

Focus on the field of chronic cardiovascular and cerebrovascular diseases and build a leader in the 37 industry. China Resources 39, a subsidiary of China Resources Group, transferred 51% of China Resources Torch's shares to Kunyao Group. On the one hand, this move solved some competition issues in the industry, and on the other hand, it will effectively unify the national Hesetong softgel market and help KCM Group become a benchmark enterprise in the 37 industry chain. China Resources Group's official entry into the 37 industry can be traced back to 2016, when China Resources 39 wholly acquired Kunming Shenghuo Pharmaceutical; in order to open up the entire 37 industrial chain, China Resources 39 (Yunnan) 37 Industrial Development Co., Ltd. was established in 2021; in 2022, an equity transfer agreement was reached with Huali Group to acquire 28% of the shares of Kunyao Group, so China Resources 39 became the largest and most comprehensive 37 leading enterprise; in 2023, China Resources 39, China Resources Pharmaceutical Group will participate in the registration of 37 7 Research Institute; in 2024, China Resources Pharmaceutical Group will participate in the joint registration of 37 7 Research Institute; China Resources Torch 51% Equity to achieve the integration and layout optimization of the 37 industrial chains within the group. China Resources Group actively exploited the advantages of state-owned capital investment companies and joined the Yunnan Provincial Government to open up the entire 37 industrial chain, covering all aspects of 37 cultivation (cooperation), 37 trade, sales of new tablets, 37 research, manufacturing and sales of traditional Chinese medicines, etc., to promote the inheritance and innovation of traditional Chinese medicine.

The 777 brand was grandly launched, opening a new chapter in the silver hair health strategy. Kunming Pharmaceutical Group focuses on the field of chronic disease management and aging health. On the brand side, relying on Kunyao “Luotai” and China Resources Shenghuo's “Lijiao Wang” Hesketong softgels, the company officially launched the “777” brand, starting with Hessuketong oral products and gradually expanding to a full range of product lines such as health management, disease prevention, serious treatment and post-illness rehabilitation; in terms of channels, the company further integrates commercial channels; in terms of business, the company established the three core divisions of “KPC1951 and KCM 1381 and 777” to clarify the three core business areas of management and development;, the company is empowered by China Resources Management energy efficiency is expected to continue to improve.

We believe that as the aging trend intensifies, the silver hair economy is becoming a blue ocean with huge potential. According to Zhongkang data, the top 3 generic names of proprietary Chinese medicine retail pharmacies for 2020-2023H1 cardiovascular (excluding high blood pressure) diseases are: Angong Gyuhuang Pills, Compound Salvia Droplets, and Blood Sausage Softgels. The head pattern is relatively stable. Xuesaitong softgels are originally developed by Kunming Shenghuo Pharmaceutical and Kunming Pharmaceutical Group. There are only two manufacturers nationwide. Its main component is 37 saponins, which have the effect of activating blood stasis and invigorating blood circulation. It is used during the meridian recovery period in ischemic stroke (cerebral infarction) caused by blood stasis and blockade.

According to the “China Stroke Prevention Report 2021”, stroke has become the number one cause of death and disability in adults in China. It is characterized by high incidence rate, high recurrence rate, high disability rate, high mortality rate, and high financial burden.

The incidence and prevalence of ischemic stroke in China increased year by year from 2010 to 2019. The number of patients discharged from ischemic stroke in 2019 increased about 4 times compared to 2010, and the cost of inpatient medicine per capita increased 37% compared to 2010. This growing trend is due, on the one hand, to changes in population structure brought about by aging, and on the other hand, from people's increased awareness of stroke prevention and treatment. We are optimistic about the strategic positioning of the company's “Silver Hair Health Industry Leader” and the subsequent market space for the Blood Saetong series.

Investment advice: The company is a leading natural botanical medicine company. It has always focused on chronic disease treatment in the past, and has formed a high brand barrier. Over the past year, China Resources has continued to advance four major restructurings, and indicators such as gross profit margin, net interest rate, ROE, and balance ratio have all improved. The company is positioned more clearly. Taking advantage of Yinfa's economy, it is committed to becoming “a leader in the Yinfa health industry, a leader in premium Chinese medicines, and a leader in aging health-chronic disease management”. We are optimistic that China Resources will empower the company in various aspects of brand, product, channel, and management. We expect the company to achieve revenue of 8.509/9.469/10.345 billion yuan in 2024-2026, up 10%/11%/9% year on year, respectively; achieve net profit of 0.577/0.739/0.941 billion yuan, up 30%/28%/27% year on year, respectively; corresponding PE valuations are 22/17/14X, maintaining a “buy” rating.

Risk warning: Industry procurement policy risks, rising Chinese herbal medicine costs risk, product sales falling short of expectations, R&D innovation risk, integration falling short of expectations.