The decline in sales of Kewei dragged down 2020 performance: the company achieved revenue of 2,348 billion yuan (same below) in 2020, down 62.27% year on year; net profit of 839 million yuan, down 56.2% year on year. Without considering the impact of convertible bonds, adjusted net profit was 590 million yuan, a year-on-year decrease of 71.8%. The main reason for the decline in performance is the decline in sales volume of the company's core product, Kewei, due to the COVID-19 pandemic and the decline in the incidence of influenza.

The product pipeline is growing, and new products are contributing to secondary growth: in recent years, the company has continuously accelerated its layout on other products, and has made many positive developments in 2020. Various products have been approved for listing one after another, expanding the company's product pipeline. In the national drug collection conducted in January, August 2020, and February 2021, many of the company's products successfully won the bid. These product companies had very low sales and market share before. After winning the bid, they are expected to open up the market relatively quickly and optimize the revenue structure. Meanwhile, 20 of the more than 30 chemical-generic drug products previously introduced by the company from the research institute have been approved, and the remaining products are expected to be approved this year. If the newly launched product can win the bid in the subsequent national drug collection, it can bring additional revenue to the company. In terms of innovative drugs and biopharmaceuticals, in addition to recombinant human insulin and imitavir phosphate, which were approved in 2020, glycine insulin and mendon insulin have also been declared for listing and are expected to be approved for marketing in 2021-2022; both rongliflozin and liraglutide are in phase III clinical trials. The successive approvals of these products will help the company further enrich its product pipeline and optimize its revenue structure. In addition, recently, the controlling shareholder of the company plans to grant 10% of the shares of Dongyangguang Research Institute to the company free of charge through itself or a designated third party. The company can also give priority to obtaining the commercialization rights of the Institute's products in China at zero consideration and cooperate and trade through a revenue sharing model. In the context of deepening cooperation between the two sides, the product pipeline that the research institute continues to promote will also bring a certain increase in the company's performance.

Profit forecast and valuation: Considering the impact of the decline in the incidence of influenza on Kewei's sales, we lowered our forecast revenue for 2021-2022 to $19.44 and $3.34 billion, forecast revenue for 2023 to $3,791 billion, year-on-year changes of -17.2%, 66.6%, and 17.0%. The 2021-2022 reductions were 72.3% and 57.0%, respectively; lowered the predicted net profit for 2021-2022 to 428 million and 617 million yuan. Yuan, year-on-year changes of -49.0%, 44.1%, and 32.8%, with declines of 79.7% and 72.7% in 2021-2022, respectively. The target price was lowered to HK$10.50, corresponding to 18.21, 12.64, and 9.52 times PE in 2021-2023, respectively, maintaining the “buy” rating.

Risk warning: Market competition has intensified, sales of new products have fallen short of expectations, and the incidence of influenza has dropped more than expected.