Controlling shareholder Sinopharm Hong Kong will suspend privatization plan
The company announced on August 11 that its controlling shareholder, Sinopharm Hong Kong, said it would no longer press ahead with its privatization plan and that it would not be able to apply for privatization of the company in the next six months without major changes.
Business performance is expected to be good in the first half of 2021, but management changes reflect that there may be room for improvement in internal management. we have recently evaluated the company's performance in the first half of 2021 and are expected to do well in the first half of the year. The company will announce its results on August 20, and we expect revenue to increase steadily, so we think that the suspension of privatization has nothing to do with the company's performance. The brand awareness of traditional Chinese medicine itself is very high. The main products, traditional Chinese medicine formula particles, are made from traditional Chinese medicine directly extracted by modern technology, without additives, so they are more safe and more in line with the theory of "syndrome differentiation and treatment, plus or minus with syndrome". Therefore, personalized treatment can be provided according to the needs of patients. Compared with ordinary traditional Chinese medicine and traditional Chinese medicine, traditional Chinese medicine formula granules do not need to be decocted and easy to carry, so they meet the fast-paced needs of modern people, and we think that the products have broad prospects in domestic demand. Chinese traditional medicine itself has a strong sales network, which currently covers more than 5000 general hospitals and more than 2000 traditional Chinese medicine hospitals, so it does not need to rely on the sales network of Sinopharm Group. We expect that the suspension of privatization will not affect the operation of the company, but the suspension of privatization also shows that the company has not reached an agreement with major shareholders in some aspects, and there have been recent management changes in the company. The company announced earlier that Wang Xiaochun resigned as managing director, but he remained as executive director and also served as vice chairman. Cheng Xueren, former vice president and general manager of the Guangdong side, will act as managing director. Guangdong is the leading manufacturer of traditional Chinese medicine formula granules in China, and Mr. Cheng has rich experience in management. we believe that we are able to lead the company to sustained and steady development, but the management changes also reflect that there may be room for improvement in the company's internal management. the running-in of the new management still takes time.
The evaluation is lowered to "neutral", and the target price is adjusted to HK $4.45. we believe that the company is in good condition and maintain the original profit forecast. It is estimated that the net profit of 2020-23e shareholders will be 17.4%, but the controlling shareholder has suspended the privatization plan, and the company has recently undergone management changes. The capital market may have doubts about the uncertainty of the company's operation. We downgraded our rating from "overweight" to "neutral" and lowered our target price from HK $5.45 to HK $4.45, corresponding to 10.5 times 2021E PER.
Risk hint
(1) COVID-19 repeatedly affects the operation; (2) the competition of traditional Chinese medicine formula granule plate may intensify.