Business is expected to resume in 2021; the new target price is HK $6.02, reiterating "buy"
Shisiyao Group (Shisiyao) had revenue of HK $4.26 billion (down 8.1% from the same period last year) and net profit of HK $612 million (down 46% year-on-year; 39% year-on-year after deducting land disposal income). The decline in endogenous profits is in line with our expectations (down about 40 per cent from the same period last year), mainly due to weak sales of large infusion plates and volume purchases leading to lower prices of moxifloxacin. We expect that, driven by 1) the rebound of large infusion plates and 2) the rapid release of small water needles and APIs, Stone four drugs will recover in 2021, with a net profit of more than HK $1.3 billion. Taking into account the momentum of recovery from 21 years, we have raised our 22-year EPS forecast by 6% to HK $0.43, HK $0.53, forecast 23-year EPS of HK $0.62, and raised the target price by 5% to HK $6.02 based on 14 times the 2021 forecast PE (the average of comparable companies). Maintain "buy".
The gross profit margin maintains the upward trend; the sales expense rate remains high.
We expect the gross profit margin of Stone four drugs to maintain an upward trend in 2021 (2020: up 1.5 percentage points to 63.6%), due to an increase in income from therapeutic transfusions (such as levonidazole and peritoneal dialysate). However, we believe that the sales expense rate will remain above 30% from 2021 (up 10.7% to 37.9% in 2020), due to increased marketing spending due to the launch of new small needle products (such as doxophylline and ropivacaine).
Large infusion plate: optimistic about continued recovery, therapeutic infusion contribution increased infusion income of HK $2.64 billion in 2020 (down 32 per cent year on year), while 1H20 fell 40 per cent year on year, indicating a slowdown in the decline of 2H20. We expect sales of the large infusion sector to pick up rapidly in 2021, with a year-on-year growth of more than 20% (Stone four Pharmaceutical guidelines predict that major infusion sales will reach 1.6 billion bottles / bag vs2020 in 2021), mainly due to the potential promotion of the following varieties: 1) non-PVC soft bags / upright soft bags (sales of non-PVC soft bags / upright bags fell by 34% in 2020); 2) plastic / glass bottles (sales fell by 1945% in 2020). In addition, we believe that the contribution of therapeutic infusion revenue is expected to pick up in 2021, or reach about 25% of large infusion sales (therapeutic infusion revenue accounted for 21.6% of large infusion sector sales in 2020, down 0.7 percentage points, mainly due to weak sales of moxifloxacin).
The small water needle is released rapidly, and the raw material drug is released gradually.
The sales volume of small water needles reached 863 million yuan in 2020, an increase of 151% over the same period last year. We expect sales to be close to 1.5 billion yuan in 2021. The driving factors include: 1) new production line of 10ml PP ampoule bottled injection; 2) acceleration of leading varieties such as doxophylline, ambroxol and betastine.
The sales of APIs reached 206 million yuan in 2020, and the management guidelines forecast sales of about 600 million yuan in 2021, with the main revenue contribution coming from varieties such as azithromycin and caffeine.
Risk hint: the recovery of large infusion business is slower than expected; the price of APIs falls.