Incident: 1) According to the company's announcement, on December 19, 2024, Shennong Technology Group and Jinchuang Investment signed a “Share Transfer Agreement”. Shennong Technology Group accepted Jinchuang Investment to hold 71,508,968 shares (accounting for 14.61% of Guangyuyuan's total share capital); 2) Recently, the company signed a development cooperation agreement with the Institute of Traditional Chinese Medicine of the Chinese Academy of Traditional Chinese Medical Sciences.

The oldest existing traditional Chinese medicine company and pharmaceutical brand. According to the company's 2023 annual report, the company was founded in the 20th year of Jiajing in the Ming Dynasty (AD 1541). It has a history of 483 years. It is the traditional Chinese medicine enterprise and pharmaceutical brand with the longest history of uninterrupted transmission in China, and the first batch of “Chinese time-honored brands” enterprises in the Ministry of Commerce. According to the company's official website, in the Qing Dynasty, Guang Yu Yuan and Guangzhou Chen Liji (founded 1600), Beijing Tong Ren Tang (established 1669), and Hangzhou Huqing Yu Tang (established in 1874) were also known as the “Big Four Pharmacies”. After nearly 500 years of uninterrupted succession, Guang Yue has accumulated more than 100 classic ancient recipes and many techniques for preparing traditional Chinese medicine. According to the company's announcement, in July 2021, the controlling shareholder of the company was changed from Dongsheng Group to Jinchuang Investment, and the actual controller of the company was changed to the Shanxi Provincial State-owned Assets Administration Commission.

The core products have a long history, have a brand heritage, and highlight heritage values. According to the company's 2023 annual report, the company's core business is the proprietary Chinese medicine business, which covers the three major sectors of traditional Chinese medicine, fine traditional Chinese medicine, and health wine.

The company currently has 8 dosage forms of pills, powders, tablets, hard capsules, granules, oral liquids, infusions, and alcohol; 104 drug registration approvals; 1 health food license; 1 liquor license; 241 domestic trademarks; and 28 patented technologies. The company's holding subsidiary, Shanxi Guangyuyuan, has a total of 36 drugs included in the “National Essential Drug Catalogue” and 61 drugs have been selected in the “National Drug Catalogue for Basic Medical Insurance, Work Injury Insurance and Maternity Insurance”. The company has four core varieties of Kulingji, Dingkundan, Angong Niuhuang Pills, Niuhuang Qingxin Pills, and a total of more than 100 kinds of traditional Chinese medicine approval numbers. Among them, Kulingji is a living specimen with the most complete compound refining technology in China. It is known as a “living fossil of traditional Chinese medicine”, and both of them are classified varieties by the state. The production techniques of the company's Gurenji, Dingkundan, and An Gong gyuhuang balls have all been selected on the national intangible cultural heritage list, while the production techniques of beef yellow Qingxin pills and Nishihuang pills have been selected on the Shanxi Intangible Cultural Heritage List. At the same time, Dingkundan and Angong beef yellow balls were certified as the first batch of “Shanxi Premium Products”, and the traditional production techniques of Liuwei Dihuang pills and ginger charcoal production techniques were selected on the Jinzhong Intangible Cultural Heritage List.

Since the Shanxi State-owned Assets Administration Commission joined the company in 2021, the reforms have begun to bear fruit:

Revenue rose steadily, and net profit to mother changed from loss to profit in '23. According to the company announcement and 2023 annual report, the company achieved revenue of 1.203 billion yuan (YoY -7.07%), 1.088 billion yuan (YoY -9.57%), 1.093 billion yuan (YoY 0.48%), 1.131 billion yuan (YoY 3.44%), and 1.284 billion yuan (YoY 13.56%) in 2019-2023; realized net profit to mother was 0.059 billion yuan, respectively billion yuan (YoY 11.33%), 0.012 billion yuan (YoY -80.16%), -0.057 billion yuan (YoY -581.13%), -0.25 billion yuan (YoY -341.25%), 0.09 billion yuan (YoY 136.03%).

There have been certain improvements in the company's internal control: 1) Cash received from sales of products has increased dramatically. According to the company announcement and iFind, since the company implemented a cash delivery policy in the fourth quarter of 2022 (with the exception of the classic Chinese medicine division for hospital commerce and e-commerce business for the digital economy division), the cash received by the company from selling products and providing services was 1.256 billion yuan and 1.535 billion yuan respectively, up 23.10% and 22.20% year-on-year respectively; 2) Accounts receivable declined significantly, according to the company announcement and iFind, in 2022 and 2023, the company set up a special working group to carry out a special action to “reduce accounts receivable”. Accounts receivable were 0.875 billion yuan and 0.488 billion yuan respectively, down 19.39% and 44.19% from the previous year; 3) The sales expenses rate dropped significantly. On May 26, 2022, the company issued the “Notice of Guangyuyuan Traditional Chinese Medicine Co., Ltd. on Issuing an Implementation Plan for Carrying Out Special Actions to Reduce Costs and Increase Efficiency”, according to iFind, In 2023, the company's sales expenses were 0.643 billion yuan, a year-on-year decrease of 18.84%, and the sales expenses ratio was 50.11%, a year-on-year decrease of 20 pcts.

Shennong Technology Group transferred the company's shares held by Jinchuang Investment to further rationalize the property rights relationship and unify the company's management rights with share property rights. According to the company's announcement, on December 19, 2024, Shennong Technology Group and Jinchuang Investment signed a “Share Transfer Agreement”. Through an agreement, Shennong Technology Group transferred 71,508,968 shares of the company (accounting for 14.61% of the company's total share capital). The price of this share transfer is 16.5346 yuan, and the total transaction amount is about 1.182 billion yuan. The funding source is Shennong Technology Group's own or self-funded capital. After the transaction was completed, Shennong Technology Group directly held 74,233,468 shares of the company, accounting for 15.17% of the company's total share capital. The actual controller of the company has not changed, and the Shanxi Provincial State-owned Assets Administration Commission is still the actual controller of the company.

Join hands with the Institute of Traditional Chinese Medicine of the Chinese Academy of Traditional Chinese Medical Sciences to create a new chapter in the inheritance, innovation and development of traditional Chinese medicine. According to the company's official account, on December 16, 2024, the company signed a development cooperation agreement with the Institute of Traditional Chinese Medicine of the Chinese Academy of Traditional Chinese Medical Sciences. The Institute of Traditional Chinese Medicine of the Chinese Academy of Traditional Chinese Medical Sciences was founded in 1955. It has gathered a large number of outstanding scientific research experts represented by Nobel Prize winners. It has quality assurance of authentic medicinal herbs and continuous use of resources from various national research platforms, such as the National Key Laboratory, and has produced a series of important scientific research results such as artemisinin, and has strong scientific research capabilities in the field of traditional Chinese medicine research. As an important inheritor of traditional Chinese medicine culture, the company has always aimed to “revitalize” “old brands”. This strategic cooperation with the Chinese Academy of Traditional Chinese Medical Sciences in traditional Chinese medicine research will inject strong scientific research momentum and development confidence into the company.

Investment advice: The company is the traditional Chinese medicine enterprise and pharmaceutical brand with the longest history of uninterrupted succession in China. The core products have a long history and brand heritage. Since the Shanxi Provincial State-owned Assets Administration Commission joined the company in 2021, the reform has begun to bear fruit. As the state-owned enterprise reform continues to deepen, the company can look forward to the future. We expect the company to achieve operating income of 1.303 billion yuan, 1.368 billion yuan, and 1.478 billion yuan in 2024-2026, and net profit to mother of 0.099 billion yuan, 0.113 billion yuan, and 0.128 billion yuan, with year-on-year increases of 10.3%, 13.7%, and 13.4%, respectively. The corresponding EPS is 0.20 yuan, 0.23 yuan, and 0.26 yuan respectively. The PE multiples corresponding to the current stock price are 98X, 86X, and 76X, respectively. Considering that the results of the company's state-owned enterprise reforms in the past were obvious, and in the future, as the state-owned enterprise reform continues to deepen, the company is expected to usher in high-quality development, cover for the first time, and give it an “increase in weight” rating.

Risk warning: industry policy risk, risk of increased market competition, risk of fluctuations in raw material supply and price, risk of collection price reduction.