Key points of investment
1. Kangson Pharmaceutical (01681.HK) is a modern pharmaceutical company mainly engaged in R&D, production and marketing of modern proprietary Chinese medicines and medical imaging comparators. The company's business composition includes Kangson Pharmaceutical's nephrology sector (54% of revenue), the medical imaging sector (10% of revenue), the maternity sector (5% of revenue), and the Yulin pharmaceutical product line (revenue share has risen to about 30%).
2. Guangxi Yulin Pharmaceutical, a “time-honored Chinese brand” company acquired by the company, previously earned less than 400 million dollars due to management and operation problems of old state-owned enterprises, and profits continued to decline. However, we discovered that Yulin Pharmaceutical has many OTC products with great potential for development, such as Orthosin Water, Wet Toxins, and Chicken Bone Herb. The total market potential exceeds 2 billion dollars, which is double the revenue of the original Kangchen Pharmaceutical industry.
3. After Kangchen gradually joined Yulin Pharmaceutical in 2015, it carried out a series of reforms such as strengthening internal management, building its own sales team, refining cost control, and increasing the number of sales (the sales team increased from over 70 to about 400 people now). The results were remarkable. Revenue grew rapidly, and net profit margins doubled. We believe that the dividends of the reform will continue to be released in the future. With Yulin Pharmaceutical's excellent product reserves, the revenue and profits of listed companies are expected to double within a few years.
4. The awareness rate of kidney disease in China is only 5%, and there is still plenty of room for potential. The company's traditional flagship product, uremia, is the only national traditional Chinese medicine preparation for the treatment of early to middle stage chronic renal failure in China. The leading position is stable, product prices are stable, and it will continue to grow steadily with the industry. The company is expected to be included in the Hong Kong Stock Connect in March 2018, and its liquidity and attention will increase dramatically. Yulin Pharmaceutical, a subsidiary of the company, is expected to be listed separately on A-shares in the future.
5. We expect the company's revenue for 17-19 to be 1.69 billion, 2.02 billion, and 2.40 billion yuan respectively, and net profit attributable to shareholders of listed companies of 398 million, 474 million, and 561 million yuan respectively. The corresponding PE was 15.8x, 13.2x, and 11.2x respectively, giving recommended ratings.
Risk warning: Yulin Pharmaceutical's product promotion speed fell short of expectations, Yulin Pharmaceutical's A-share listing process fell short of expectations, the estimated market space for Yulin Pharmaceutical's products fell short of expectations, the growth rate of the nephrology sector fell short of expectations, industry competition intensified, industry regulation and policy risks, and the change in market style caused the valuation center to shift downward.