Investment logic

The integrated development of “pharmaceutical formulations+raw materials+pharmaceutical excipients” led to rapid growth in the company's performance. After more than 20 years of development, the company has built an organic industry chain from high-end APIs to formulations, extraction from traditional Chinese medicines to proprietary Chinese medicines. In 2017, the rapid release of loxoprofen sodium gel patch helped the company's performance grow rapidly. In 2017-2023, the company's net profit CAGR was about 32%. In 2023, the company's net profit to mother was 0.368 billion yuan (+36.5% YoY), and in Q1 2024, the company's net profit to mother was 0.126 billion yuan (+63.4% YoY), continuing to perform well.

The short-term pattern of loxoprofen sodium gel patch is good, and it is expected to be distributed through both channels in and outside the hospital.

① Competition pattern: According to existing policy documents, we believe that it is difficult for loxoprofen sodium gel patches to be approved for marketing through BE in the short term. Currently, only Beijing Tide has completed phase III clinical trials among the contestants declared for listing, and the company's products are expected to maintain a good competitive pattern in the next 2-3 years. ② Collection is beneficial to in-hospital distribution: The company's products have been included in collection in many places, and prices in many places have been reduced by 25%. We expect that collection will optimize the company's sales expenses and help the number of products released in hospitals. ③ The out-of-hospital market is expected to become a new growth point: in-hospital sales of loxoprofen sodium gel patch in '23 accounted for 94.16%, and out-of-hospital sales accounted for 5.84%; in Q1, the proportion of in-hospital sales was 82.34%, and out-of-hospital sales accounted for 17.66%, showing results in out-of-hospital expansion. The company's loxoprofen sodium gel patch achieved revenue of 1.547 billion yuan (+18.7% year over year). Based on the above analysis, we expect the 24-26 loxoprofen sodium gel patch revenue to be 1.584 billion yuan/1.823 billion/ 2.151 billion yuan, respectively, up 2.4%/15.0%/18.0% year-on-year respectively.

The product echelon is gradually forming, and more blossoms can be expected in the future. ① The company's ketoprofen gel patch was approved for sale in February 23, and entered the national medical insurance catalogue in that year. Currently, only domestic ketoprofen gel patches have been approved for marketing, and they are expected to increase rapidly in 24-26. ② The company has declared production of several products: In the field of anti-inflammatory and analgesic pain relief, the company declared production of Jiaoqi Musk Gel Patch and Indomethacin Gel Patch at the end of 23. Among them, Jiaoqi Musk Gel Patch is a Class 1 innovative traditional Chinese medicine. It is another potential variety of the company. According to the company's investor relations management information, it is expected to be approved for listing in '25. In addition, the company declared production of lidocaine gel paste and riprocaine cream in early '23.

Issuance of convertible bonds for oral solid formulation projects in the High-end Formulation R&D Industrial Park. On October 13, 2023, the company issued 0.36 billion yuan of convertible bonds for the oral solid formulation project in the High-end Formulation R&D Industrial Park. After adjustment on June 7, 2024, the conversion price was 15.33 yuan/share.

Profit forecasts, valuations, and ratings

The company's loxoprofen sodium gel patch is still expected to enjoy a good competitive pattern in the short term. Ketoprofen gel patches are expected to continue to be released in 24-26 years, and the company's product lineup is gradually growing, so more blossoms can be expected in the future. We expect the company's net profit to be 0.514 billion yuan/0.661 billion/ 0.817 billion yuan respectively, up 39.5%/28.6%/23.6% year-on-year, respectively, and corresponding EPS of 1.06 yuan/1.36 yuan/1.68 yuan respectively. We gave the company 25 x PE for 24 years, corresponding to a market value of 12.85 billion yuan and a target price of 26.40 yuan. For the first time, coverage gave the company a “buy” rating.

Risk warning

Market competition increases risk, risk of product volume falling short of expectations, risk of R&D progress falling short of expectations, risk that a single product accounts for relatively large risks, risk of convertible debt-for-equity dilution, etc.