On April 24, we participated in the research activities of the Shanghai Songjiang Base of Olympic Star Life Technology. During the 4-hour research activity, we visited the pharmaceutical water production system and clean room plant, and carefully communicated with the management of the company on the business and development of the company, and formed the following views.
Aoxing was founded in 2003 and its business is focused on pharmaceutical equipment, technology and services in the middle and high end market. The company's main customers are high-tech biopharmaceutical R & D enterprises (for vaccines, protein drugs and monoclonal antibody drugs) and Chinese pharmaceutical companies that export to European and American markets. as a result, nearly 80% of the company's income comes from the integrated services of these two customers. Since the domestic GMP transformation income accounts for about 20%, the domestic GMP certification cycle will not affect the company's growth. The company's customers include Lijun Group, Haizheng Pharmaceutical Co., Ltd., Chengdu Biological products Research Institute, Hualan Biology, Shanghai Biological products Research Institute, GlaxoSmithKline PLC and other well-known pharmaceutical companies.
The founder, Mr. he Guoqiang, is a Hong Kong citizen and serves as chairman and CEO of the company. He has nearly 30 years of experience in equipment, engineering and technology in the pharmaceutical industry, and has a deep understanding of China's biopharmaceutical industry. The he Guoqiang family holds a 66% stake in Aoxing, and the company has a sound incentive mechanism.
At present, the company has more business, which is divided into six units: fluid and biological process system, clean room and automatic control and monitoring system, powder solid system, GMP compliance service, life technology consumables and pharmaceutical equipment distribution and agent, of which the first two business units, Aoxing has strong technical advantages and competitiveness.
The compound growth rate of the company's revenue and net profit from 2012 to 2014 was 27.1% and 35.5% respectively, and the average gross profit margin was 32.2%, showing a steady upward trend. Revenue fell slightly by 3.6% in 2014, due to revenue recognition problems and the relocation of Shijiazhuang base in the second half of 2014. In the future, the business drivers of its integrated business will mainly include biotechnology systems, automation control and powder solid systems, with high visibility due to the improvement of revenue and gross profit margin.
60 per cent of 55 per cent of annual orders will be confirmed in the same year, with 367 million orders in hand at the end of 2014, 90 per cent of which will be accounted for in 2015, with an order target of 1 billion in 2015. Revenue is expected to reach 880 million in 2015, gross profit margin will rise by at least 1 percentage point, and we expect it to be close to 35 per cent.
The income proportion of the three fees expenditure in the past three years is 17% Mur18%, and the company's overall expense expenditure is relatively fixed. It is expected that the proportion of the three fees will decline steadily in the future, which will have a positive effect on the improvement of profit margins.
The funds raised by the company in IPO in the next 3 years are mainly invested in the R & D and manufacturing bases in Shijiazhuang and Shanghai. The Shijiazhuang base will be expanded from the current 8700 square meters to 35000 square meters, and the Shanghai Songjiang base will be expanded from 8200 square meters to 18000 square meters, and the related capital expenditure will reach 130 million and 37 million yuan respectively in the next three years.
A healthy balance sheet. At the end of 2014, the company's total assets increased by 43 per cent to 870 million compared with the end of 2013, and shareholders' equity increased by 328 per cent to 549, mainly due to cash inflows and profit growth from IPO. At the end of the period, the company had 389 million in cash and only 35 million in interest-bearing debt, which is at the net cash level. Aoxing's inventory turnover days and receivables turnover days are 59 days and 96 days respectively. The faster asset utilization rate enables the company to achieve a higher ROE under lower financial leverage. In the past two years, the company's ROE reached 41% and 12% respectively. In the future, we expect the company's ROE to remain above 15%.
Future highlights: biological process system, automatic control and powder solid system. Specifically, the freeze-drying equipment that Q3 withdrew in 2015 and the subsequent launch of a disposable process system, as well as a variety of new equipment, including light inspection machines. Among them, the launch of freeze dryer is expected to replace domestic imported equipment, and strive to obtain 2-3 orders in 2015, Q2 in 2016, and expected ideal income of 500 million yuan in the future.
During the visit, we were impressed by the cleanliness, efficiency and strict management of the pharmaceutical water production system and the clean room plant. Aoxing has a clear understanding of the integration of international pharmaceutical services, and this soft power is reflected in manufacturing, construction and compliance services, which will help to enhance the company's competitiveness in the long run.
In the future, Olympic Star may enhance its competitive advantage through acquisitions. We believe that Aoxing is a scarce high-quality company providing pharmaceutical integration services in Hong Kong stocks, and the company's performance and valuation have significant room to rise. We expect the company to grow into a high-quality enterprise with a profit of more than 200 million yuan and a market capitalization of more than 6 billion yuan from 2017 to 2018. The valuations of Aoxing in A shares and Hong Kong shares are Dong Fulong, Chutian Technology, BBI Life Technologies and Giant Star International, respectively. We give Olympic Star a "buy" rating with a 12-month target price of HK $5.6, equivalent to 25 times forward earnings in 2015. (current price as of April 27)