Key points:

The company uses Ganoderma lucidum spore powder and dendrobium officinale as its core products. The company has a century-old brand of traditional Chinese medicine. Shouxiangu Pharmaceutical Co., Ltd. was founded in 1909, and Zhejiang Shouxiangu Pharmaceutical Co., Ltd. was established in 1997. In 2011, Shouxiangu was awarded the “Time-honored Chinese Brand” by the Ministry of Commerce; in 2013, two ISO international standard projects, Ganoderma lucidum and dendrobium officinale were established; in 2014, Shouxianggu's traditional Chinese medicine preparation techniques were selected as representative projects of national intangible cultural heritage; in 2018, the company established “Traditional Chinese Medicine-Dendrobium officinale” and “Traditional Chinese Medicine-Ganoderma lucidum” ISO international standards. In 2022, the company established Xianshugu Biological Breeding Innovation The center won the first prize of the Zhejiang Science and Technology Progress Award in 2023 and the first prize of the National Science and Technology Progress Award in 2024.

The company is mainly engaged in the selection, cultivation, processing and sale of varieties of famous Chinese herbal medicines such as Ganoderma lucidum and dendrobium officinale. It focuses on famous and rare traditional Chinese medicines such as “One Zhi Zhi, One Dendrobium, One Flower, One Herb”, established eight standardized planting bases, planted more than 20 Chinese herbal medicines with special advantages from Zhejiang, and developed “seven series” of health products. At present, a product pattern of “mainly traditional Chinese medicine tablets, supplemented by health foods” and “traditional Chinese medicine tablets are mainly products based on Ganoderma lucidum spore powder products, dendrobium officinale products, and supplemented by other traditional Chinese medicine tablets”.

On the revenue side, the proportion of Ganoderma lucidum spore powder products has remained around 70% in recent years, and dendrobium officinale products account for about 15%; on the gross profit side, Ganoderma lucidum spore powder products have contributed over 70% of gross profit, and dendrobium officinale products have contributed about 15% gross profit.

The advantages of the whole industry chain provide a guarantee for the quality of the company's products

By establishing a “one chain, two, three full nine systems” full-industry chain development model, the company has achieved a complete traditional Chinese medicine industry chain of “basic scientific research in traditional Chinese medicine → selection of excellent varieties → wild-like organic cultivation → research and development of traditional health recipes → modern traditional Chinese medicine preparation and active ingredient extraction process research → clinical application of traditional Chinese medicine”, and has established a “one horizontal and one vertical” whole industry chain standardization system. It is one of the few enterprises in the industry. Implement an ID card traceability system and establish a full quality control system; Chinese medicine preparation, tablets, direct oral powder, inspection and testing center, and 10,000 grade clean inspection room have passed GMP certification by the China Food and Drug Administration; production lines for extraction of active ingredients from traditional Chinese medicine, extracts, capsules, granules, tablets, etc. have passed GMP certification for health food by the Zhejiang Food and Drug Administration. Product quality is guaranteed through variety autonomy, proper cultivation, and innovation; industrial development is promoted through integrated enterprise management through intelligent production, data management, and cloud-based sales, and the guarantee of homogenization of medicine and food.

Technological innovation builds a wider product moat

The company's products are supported by the “122357” technology platform, that is, 1 area, 2 rooms, 3 stations, 5 hospitals, 7 centers. The company's R&D team consists of 141 people, accounting for 15.29% of the total number; 28 external experts, including 9 academicians. In terms of breeding excellent varieties, the company selected 10 excellent new varieties with independent intellectual property rights and obtained 6 national variety rights. Compared with conventional varieties, the yield increased by 29%-72%, and the content increased by 17%-168%. Lead or participate in the formulation of 93 standards for various types of traditional Chinese medicine, and lead the formulation of ISO international standards “Traditional Chinese Medicine - Ganoderma lucidum” and “Traditional Chinese Medicine - Dendrobium officinale”. The company has established a targeted transformation path of “excellent varieties → high-quality medicinal herbs → high-quality products”, and established a quality control system with process control as the core to ensure product consistency. Among the company's technological innovation advantages, wall removal technology is the most prominent. Currently, it is the only company in the market that has mastered wall removal technology.

The company's original low-temperature supersonic airflow purification technology for Ganoderma lucidum spore powder has obtained international invention patents in seven countries. It has been evaluated by seven academicians and other experts, and is at the leading international technical level. On the basis of breaking the wall, the company's spore powder wall removal technology separates the shell remaining after breaking the wall from the active ingredients, and greatly increases the content of active ingredients and nutrients: compared with broken wall Ganoderma lucidum spore powder, the total triterpene content per 100 grams of defused Ganoderma lucidum spore powder is 5.5 times that of broken wall, and the triterpenic acid content of 23 types of Ganoderma lucidum is 27.4 times higher than that of broken wall. Crude polysaccharides are 10.8 times higher, and reducing sugar (in terms of glucose) is 25.4 times higher than that of breaking the wall; among nutrients, the content of 16 kinds of amino acids breaking the wall is 26% higher than that of breaking the wall, small-molecule peptides are 2.1 times higher.

Furthermore, the absorption rate of some medicinal ingredients in the body is 13-50 times higher than that of Ganoderma lucidum spore powder. Anti-tumor activity of Ganoderma lucidum spore powder is 53.17%-101.34% higher than that of wall-breaking Ganoderma lucidum spore powder, which enhances innate immunity and cardiovascular function.

The company has carried out research on the functional mechanism of traditional Chinese medicine and evidence-based medical research. It has carried out 22 clinical studies on the efficacy and safety of deswalled Ganoderma lucidum spore powder for adjuvant treatment of patients with colon cancer after surgery, treatment of cancer-induced fatigue in breast cancer patients during chemotherapy, treatment of stage IV gastric cancer with anti-wall Ganoderma lucidum spore powder, drug screening model based on the Mini-PDX model for ovarian cancer.

Based on evidence-based medical research combining real-world clinical research with randomized controlled clinical trials, it has built a solid foundation for the company's technological innovation and a broad moat for the company.

With the implementation of the marketing development plan, the company is expected to return to a relatively rapid growth state. In response to factors such as changes in the international environment, slow recovery in domestic consumption, and many complementary products in the market, the company launched a marketing development plan and established a new digital and intelligent marketing system through four major levels of brand, product, channel, and organization. Integrate regional channels to achieve omni-channel full-product sales, form different product combinations according to the consumption characteristics of different channels, and form a unified and unique product matrix. According to profit/sales and product growth, the company's products are divided into four major categories: Junqian products are the main products, which have strong core competitiveness; the main products are supplementary products, which are sub-brands and dual brand products of Shouxianggu technology iteration; the secondary products are tactical products, which are used to drain the Junchen category; and the products are complementary products, involving ordinary drinks, agricultural products, general food, daily chemicals, etc. In terms of channels and sales models, a combination of direct management and distribution, integration of online and offline methods, and price control is carried out.

In 2023, due to the slowdown in economic growth and consumption upgrades falling short of expectations, the company's revenue fell 5.39% year on year, net profit to mother fell 8.39% year on year, and net profit after deducting non-return to mother fell 10.45% year on year.

2024Q1's performance picked up as a result of the implementation of various marketing and other initiatives. 2024Q1 revenue increased 7.15% year over year, net profit to mother increased 23.19% year over year, and net profit after deducting non-return to mother increased 22.3% year over year.

We believe that with the further implementation of the marketing development plan and the continuous development of markets within and outside Zhejiang Province, the company is expected to return to a relatively rapid growth range.

Investment advice

The entire industry chain and technological innovation have built the company's core competitiveness. The company is currently the only company in the market that has mastered wall removal technology. Its core product, Ganoderma lucidum spore powder, is significantly higher than that of wall breaking products in the same industry in terms of active ingredients, nutritional content, and human absorption rate, and has remarkable technical advantages. High-quality organic products from the entire industry chain, serial products with obvious technical advantages, and solid evidence-based medical research together form the company's moat. We are optimistic about the development prospects of the company's core products under the combined effects of policy protection, raising residents' health awareness, and increasing demand from aging.

We have made predictions for the company's main business segments:

Assumption 1: Ganoderma lucidum spore powder products benefit from the implementation of the company's marketing and enterprise development plan. They are expected to make progress in price control and market development outside the province, and the company has significant technical advantages. As the company's brand building progresses and sales channels expand, Ganoderma lucidum spore powder products are expected to continue to achieve positive sales revenue growth, and gross margin is expected to increase while costs are relatively stable. We assume that the revenue growth rates of Ganoderma lucidum spore powder products in 2024-2026 are 10%, 11%, and 11%, respectively, with gross margins of 88%, 88.5%, and 89%, respectively.

Assumption 2: Dendrobium officinale products also benefit from the implementation of the company's marketing and enterprise development plans, and the products are mature, and are also the company's core products. Driven by the expansion of sales channels and Ganoderma lucidum spore powder, considering that the sales volume of dendrobium officinale is smaller than Ganoderma lucidum spore powder, we assume that the revenue growth rate of dendrobium officinale products in 2024-2026 is 15%, with gross margins of 78.8%, 79%, and 80%, respectively.

We expect the company's revenue for 2024-2026 to be 0.868 billion yuan, 0.966 billion yuan, and 1.078 billion yuan, respectively, up 10.6%, 11.4%, and 11.5% year on year; net profit to mother will be 0.285 billion yuan, 0.332 billion yuan, and 0.376 billion yuan, respectively, up 12.1%, 16.3%, and 13.4% year on year; EPS will be 1.41, 1.64, and 1.86 billion yuan, corresponding The closing PE price of 2024.07.18 was 16.49x, 14.18x, and 12.50x, respectively. For the first coverage, we gave the company an “gain” rating.

Risk warning

1. The implementation of the company's marketing and enterprise development plan fell short of expectations;

2. Competitor technology has achieved a breakthrough, and the company is no longer the only enterprise in the market that has mastered wall removal technology.