2020 results fell short of our expectations
Dongguang Pharmaceutical announced 2020 results, which fell short of our expectations, mainly due to a sharp decline in sales of the core product Kewei. Revenue and adjusted net profit for 2020 decreased by 62.3% and 71.7% year-on-year, respectively, to $2.35 billion and $590 million.
Development trends
Core products declined sharply in 2020 and are expected to recover in the second half of the year. The company's core product, Kewei, had sales of 2.07 billion yuan in 2020, a year-on-year decrease of 65.1%. The sales volume of Kewei granules was 1.15 billion yuan, a year-on-year decrease of 73.1%. Kewei granules accounted for 55% of Kewei's overall sales, down from 2019 (accounting for 72%). We believe that mainly due to the COVID-19 pandemic, the domestic population mobility and influenza incidence rate have declined, and the number of hospital prescriptions and drug sales have declined. Meanwhile, in the fourth quarter of 2019 (high influenza season) and the first quarter of 2020 (early stage of the epidemic), Kewei brought about high inventory in channels due to panic stocking by society and hospitals.
As prescription volumes gradually recover, we expect social and hospital inventories to be digested in the first half of this year. We expect the normalization of the epidemic and the exploration of out-of-hospital sales to bring about a recovery for Kewei in the second half of this year. However, at the same time, due to the poor performance of high-margin core varieties, we expect that profit margins may continue to be pressured this year.
The company's R&D pipeline is progressing normally. In 2020, the company's national class 1 innovative drug, emitavir phosphate capsules were approved for marketing; the combined use of the NS3/4A protease inhibitor voravir phosphate and imitavir phosphate developed in collaboration with Taijing Pharmaceutical has begun a phase 3 clinical trial; the recombinant human insulin injection developed by the company has been approved for sale in 2020; we expect that glycine insulin, human insulin (premixed 30R), mendong insulin 30, and mendong insulin will be marketed in 2021, 2022, 2022, and 2022, respectively. In addition, the company purchased many drugs from Guangdong Dongguang Pharmaceutical. Among them, sigliptin phosphate tablets and sigliptin metformin tablets were successfully approved for listing in 2020. As generic drug collection continues to advance, we expect the company to introduce more innovative drugs to guarantee long-term development.
We believe that revising the inter-industry competition agreement and equity grants is still beneficial to Dongguang Pharmaceutical in general.
The company issued an announcement on the evening of March 19, 2021 to revise the peer competition agreement with Guangdong Dongguang Pharmaceutical. The agreement distinguishes the domestic and overseas business of the company and Guangdong Dongguang Pharmaceutical. Furthermore, in the future, the company can prioritize zero consideration to obtain opportunities for promotion and commercialization of domestic cooperative products in China, and cooperate and trade through a revenue sharing model. At the same time, the majority shareholder will grant 10% of the shares in Guangdong Dongguang Pharmaceutical to the company free of charge (delivery completed no later than September 30, 2021).
Profit forecasting and valuation
We lowered the adjusted core earnings per share for 2021/2022 by 71%/67%, respectively, to $0.54/0.72, taking into account the decline in Kewell's sales in 2020 and the uncertainty about the rate at which future growth will resume. The current stock price corresponds to 2021/2022 core earnings per share of 14.7 times/11.0 times the core price-earnings ratio. Considering that the controlling shareholder gave 10% of Guangdong Dongyangguang Pharmaceutical's shares free of charge and that Kewei's sales may gradually resume in the second half of the year, we maintained the outperforming industry rating, but lowered the target price by 24.7% to HK$11.00, corresponding to the core price-earnings ratio of 18.3 times/13.7 times in 2021/2022, which is 24.7% upward from the current stock price.
risks
Product price cuts have exceeded expectations; new product launches have been delayed.
