Dongrui has a leading position in the market of cardiovascular and hepatitis B drugs in China, and the number of patients in these two areas is huge and increasing year by year, and the sales of the above two series of products will rise steadily.
Dong Rui entered the huge market of drugs for hyperuricemia with the grant of non-bustatin, a gout drug. It is expected that in the next 3-5 years, more products of Dongrui will be evaluated and listed in the collection catalogue, promoting sales growth and expanding market share.
It has a mature R & D platform, and holds a 65.0% interest in Fortune Credit Suisse, a R & D platform focused on the use of drug delivery systems, and 35.0% of Congrong Oriental, a biomedical R & D company in partnership with Kang Fang Biology (9926 HK).
Its industry is highly vertically integrated, so that it can fully control the quality from raw materials to finished drugs, control costs to achieve higher profits, and improve the success rate of commercialization of research.
It is forecast that East Rui FY19A-FY22F 's earnings per share will grow at an average compound growth rate of 9.4% per share for three years, and the profit attributable to FY21F shareholders is expected to increase by 28.8% year-on-year to nearly RMB 350 million. At FY20A, Dong Rui spent HK $53.183 million to buy back 48.119 million shares and wrote off 41.504 million shares. In the first quarter of FY21E, the Group bought back and cancelled 7.724 million shares.
The Group declared a total of HK $0.10 per share in FY20A dividend and special dividend per share, together with an interim dividend of HK $0.015 per share and a dividend ratio of up to 54.3% per share. Its FY21E is estimated to pay a dividend of nearly HK $0.09 per share, a return of 6.0 per cent.
The share price is significantly discounted from the book value of HK $1.74 and HK $1.78 per FY20A and FY21E respectively. The weighted average price-to-earnings ratios of pharmaceutical companies listed on the Hong Kong Stock Exchange for this year and next year are 22.9x and 19.0x respectively, with a weighted average return of only 1.6%. The price-to-earnings ratios of Dong Rui FY21E and FY22F are only 5.4x and 4.1x respectively, which is significantly discounted from the peer valuation.
Based on its seriously undervalued valuation, ideal rate of return and high visibility of earnings growth prospects, we put Dongrui Pharmaceutical on the research tracking list and recommend buying the stock. At FY21E price-to-earnings ratio of 10.0x, we price Dong Ruimu at HK $2.77, with a potential increase of more than 84.7.