Key points of investment:

Originating from Huangdi Pharmaceutical Factory, the complex disease theory guides innovation in traditional Chinese medicine research and development: the company's predecessor, Huangdi Pharmaceutical Factory, was restructured and established as Eling Limited in 1996. Since then, it has focused on R&D and production of proprietary Chinese medicines for more than ten years, and was successfully listed on the Shenzhen main board in July 2011. Currently, it has 14 patented new drugs, and it is in a leading position in the industry in the field of central cerebrovascular and cold respiratory diseases.

The market share in the oral cardiovascular and cerebrovascular sector is over 15% ahead of peers: in the field of cardiovascular diseases, the company has developed three innovative patented traditional Chinese medicines: Tongxinluo Capsule, Sansong Yangxin Capsule, and Qianjiangxin Capsule. The scope of treatment covers the three most common indications of ischemic cardiovascular disease, arrhythmia, and heart failure in cardiovascular and cerebrovascular diseases. In 2023, the three major cardiovascular and cerebrovascular products achieved a total sales revenue of 5.49 billion yuan, and the total market share of the three in the oral cardiovascular proprietary Chinese medicine market reached 16.6%.

The popularity effect of Lianhua Qingfeng is still prominent, and the Lianhua series product matrix is expected to take shape: the main respiratory products are Lianhua Qingfeng and Lianhua cough tablets, and the varieties under development include Lianhua Qingfeng granules for children. Lianhua Qingfeng's formulation, based on the “Typhoid Fever Theory” and “Temperature Disease Rules”, mainly from the Chinese side, drew on the “Warm Epidemic Theory” experience in treating the epidemic, and was approved for listing in China in 2004. In 2023, the traditional Chinese medicine market for hospital-based respiratory diseases has exceeded 45 billion yuan. In terms of segmented cold medicine, Lianhua Qingfeng's market share is close to 20%, which is higher than the level before the epidemic. Lianhua's cough products will continue to be sold in volume after they are marketed. It is expected that after Lianhua Qinggan for children is marketed, the advantages of Lianhua series products in the field of respiratory disease medication will be further strengthened.

Continuously strengthen R&D advantages in the field of traditional Chinese medicine innovation and break into the field of chemical/biopharmaceutical innovation: In addition to its inherent advantages in cardiovascular, cerebrovascular and respiratory diseases, the company is actively expanding into fields including tumors, diabetes, nervous system, etc. Currently, in addition to pediatric lianhua Qinggan granules, also includes chaihuangli capsules, astragalus tablets, chaiqin Tonglin tablets, acacia cold granules, ginseng granules, etc. In terms of chemicals/biopharmaceuticals, the anilamoprofen injection, which is progressing the fastest in research and development, has completed phase 3 clinical trials and is being prepared for listing. The oral FLT3 inhibitor XY0206 tablets for leukemia has also completed phase 3 clinical trials.

Profit forecast and valuation: We expect the company to achieve operating income of 9.3/10.58/11.95 billion yuan from 2024 to 2026, corresponding year-on-year growth rates of -9.9%/13.8%/13.0%, respectively, and realized net profit to mother of 0.96/1.17/1.42 billion yuan, corresponding year-on-year growth rates of -28.8%/21.9%/20.6%, respectively. Based on the current average valuation value of comparable companies corresponding to PE in 2024, we believe that a reasonable target market value of the company is 30 billion yuan, and there is still room for 19% increase corresponding to the current market value of 25.3 billion yuan. Covered for the first time, and a “gain” rating was given.

Risk warning: social inventory digestion risk, new drug development risk, drug collection risk.