Key investment points:

Fangsheng Pharmaceutical is a large health industry group with innovative traditional Chinese medicine as its core. The company was founded in 2002 to build platforms for the pharmaceutical industry, health care industry and medical services through its own development and investment, and focus on innovative traditional Chinese medicine through business integration and optimization.

Thick, thin hair creates a long curve. Starting in 2021, the company will implement the “338 Major Product Development Plan” and strive to build 3 large 1 billion products, 3 0.5 billion products, and 8 products over 100 million in the next 5-10 years. Through years of accumulation and exploration, the company has gradually established a growth path for the company's main business: always adhering to the core competitive advantage of “new drug research and development capabilities” and continuing to launch innovative traditional Chinese medicine products; after the launch of new products, the company strengthened academic promotion and terminal coverage to create major single products; and promoted OTC coverage and sales as the hospital market share stabilized, creating a secondary growth curve.

Innovate and empower, and blossom more. The company has a rich product matrix, focusing on cardiovascular, orthopedic, respiratory, pediatric and other fields.

1) Cardiovascular: The company's first generic drug was collected in exchange for price and volume, and achieved sales revenue of about 0.233 billion yuan in the first three quarters, with a year-on-year increase of more than 100%; it was relatively stable after the collection of blood clotong, and the Hubei Alliance Collection is expected to renew the contract this year; self-developed innovative traditional Chinese medicine medicine blood nourishment, wind and pain relief granules have been reported for production and acceptance, and are expected to be approved for listing in the first half of 2025, injecting new growth momentum into the field of cardiovascular and cerebrovascular diseases. 2) Orthopedics: Garcinia Cambogia has been fully collected, and sales are growing steadily, and are expected to be included in the national basic drug catalogue; the release volume of Xuan Qijian Bone, a Class 1.1 innovative traditional Chinese medicine, has become an important growth point in the company's orthopedic sector. We expect the annual sales of this product to exceed 100 million. 3) Respiratory system: Tengwangge Strong Loquat Cream (Honey) is the company's exclusive variety. The pressure on raw materials has been relieved in 24 years, and it is expected to resume steady growth as terminal coverage increases. 4) Children's medication: Children's Jingxing cough tablets are currently in the release stage. The product achieved sales revenue of about 60 million yuan in the first three quarters of 2024, an increase of more than 130% over the previous year. As coverage increases and experts and consumers recognize the curative effects of the product, it will also become a single product of over 100 million.

Profit forecasting and valuation. We forecast that the company's revenue for 2024-2026 will be 1.818/2.072/2.409 billion yuan, up 11.6%/14.0%/16.3% year on year; net profit to mother will be 0.262/0.313/0.366 billion yuan, respectively, up 40.3%/19.3%/17.2% year on year. Referring to the average PE of comparable companies, we gave the company 23 times PE in 2024, corresponding to a reasonable market value of 6 billion yuan. Currently, the market value is 4.9 billion yuan, and there is still room for 22% growth. First coverage with a “buy” rating.

Risk warning: risk of price reduction in product collection; sales of new products falling short of expectations; progress of products under development falling short of expectations.