Incidents:
On April 26, 2024, the company released the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 1,635 billion yuan, a year-on-year increase of 36.10%, achieved net profit of 293 million yuan, an increase of 45.42% over the previous year, and realized net profit without deduction of 246 million yuan, an increase of 26.21% over the previous year. In 2024, Q1 achieved operating income of 422 million yuan, a year-on-year increase of 20.93%, achieved net profit of 56 million yuan, an increase of 2.03% over the previous year, and realized net profit without deduction of 56 million yuan, an increase of 4.95% over the previous year.
The core product Sword continues to grow, and terminal coverage has increased again.
In 2023, there was a sharp increase in the number of cases of throat diseases and influenza in China, and demand for related drugs increased dramatically. Sales of the company's core product, Throat Sword Spray (adult+child type), continued to grow at a high rate. According to annual report statistics, the company achieved sales revenue of 1,300 billion yuan in 2023, an increase of 19.52% over the previous year. Judging from the terminal coverage, Kay Throat Sword's channel development work has once again made positive progress: (1) By the end of 2023, Throat Sword spray (children's type) had covered 334 cities and 2355 counties, covering a total of 175,000 terminals of all types, including more than 5,500 first-level hospitals, 13,000 primary care terminals, 34,000 clinics, and more than 123,000 retail terminals such as pharmacies, covering more than 98% of children's specialty hospitals in China; (2) By the end of 2023, Throat Sword spray (adult type) had covered 242 The city and 1,539 counties cover a total of 84,600 terminals of various types, including more than 3,300 first-level hospitals, 8,400 primary care terminals, 35,000 clinics, and 620,000 retail terminals such as pharmacies, covering more than 67% of domestic specialist hospitals.
The merger and acquisition integration has achieved remarkable results, and the diversified product layout is perfect.
The company attaches great importance to mergers and acquisitions integration and product diversification development strategies. Since 2020, the company has successively merged and integrated Dechangxiang, Hanfang Pharmaceutical, and Yunnan Invincible, improving the layout of the traditional Chinese medicine industry chain and expanding the product line. According to the annual report, the company currently has 40 GMP production lines for 16 dosage forms, including sprays, granules, capsules, pills, tablets, alcohol, and paste. Traditional Chinese medicine products have 166 approval numbers and more than 30 exclusive varieties, covering segments such as respiratory system, blood, gynecology, supplementation, cardiovascular, and orthopedics. The diversified product structure brought by Guizhou Sanli (parent company), Dechangxiang, Hanfang Pharmaceutical, and Invincible Pharmaceutical achieved volume through synergetic effects, and all four companies achieved profits in 2023.
(1) Dechangxiang: In 2022, we obtained 95% of Dechangxiang Pharmaceutical's shares through bankruptcy and restructuring. The company's predecessor, “Dechangxiang Pharmaceutical”, was founded in 1900 and has been developing for more than 120 years. It is the earliest pharmaceutical factory in Guizhou and the oldest existing industrial manufacturing enterprise in Guizhou. The “Dechangxiang” brand has been selected for the third batch of time-honored Chinese brands by the Ministry of Commerce. According to the 2022 mid-year report, Dechangxiang has 69 drug approval numbers, including 9 exclusive varieties and 41 medical insurance products. The core products include gynecological reconstruction pills, anti-phlegm pills, etc. In 2023, Dechangxiang Pharmaceutical achieved revenue of 129 million yuan, a year-on-year increase of 52.90%, and realized net profit of 15 million yuan, an increase of 100.06% over the previous year.
(2) Hanfang Pharmaceutical: In December 2020, the company participated in 25.6% of Hanfang Pharmaceutical's shares. In November 2023, the company further acquired the company's shares, and the shareholding ratio increased to 75.9%. As an established pharmaceutical company in Guizhou Province, Hanfang Pharmaceutical currently has 8 GMP drug production lines and more than 80 drug approval numbers, including 19 exclusive varieties and 28 national medical insurance varieties. The core varieties include astragalus gel whitening capsules, gynaecologic reconstruction capsules, Rishuan lotion/wipes, astragalus granules, children's rejuvenation granules, etc. In 2023, Hanfang Pharmaceutical achieved operating revenue of 572 million yuan, a year-on-year increase of 22.58%, and realized net profit of 63 million yuan, an increase of 62.95% year-on-year.
(3) Yunnan Invincible: In January 2023, the company indirectly controlled its subsidiary Invincible Pharmaceuticals by acquiring 61% of Haostel's shares. Invincible Pharmaceutical is a key domestic manufacturing enterprise specializing in research and production of drugs for bone diseases. It is also an old Chinese company. Its main products include Invincible capsules, Invincible Pain Relievers, Topical Invincible Cream, and Invincible Medicinal Liquor. The company successfully expanded its orthopedic product line through the acquisition of Invincible Pharmaceuticals. In 2023, the company achieved sales revenue of 35.44 million yuan for orthopedic products.
Marketing reforms continue to advance, and the Prescription Division and the OTC Division are working at the same time.
In 2023, the company deepened marketing reforms, integrated the sales force of the Chinese medicine industry, formed a prescription division and OTC division. During the year, it developed more than 700 new hospital channels, developed 15 new top 100 chains, developed more than 600 new small and medium pharmacy chains, and developed more than 60,000 new third terminals. According to the development plan, in 2024, the company will continue to promote marketing team building: (1) in the prescription division, the goal is to develop no less than 600 public hospitals above grade 2 to achieve continuous and steady growth in product sales with academic ability; (2) in the OTC division, after integrating the marketing team of Chinese medicine, the sales staff will expand to 1,200 people, which is expected to further increase to 1,600 people in 2024, enabling the company and subsidiaries to sell diversified products on the OTC side. In the long run, the company plans to build a sales team of 3,000 people over a period of 3-5 years, and the marketing system will be fully strengthened. By increasing terminal development efforts, while increasing sales of existing covered terminals, the company will vigorously expand the empty market and enhance the influence of the company's brand market.
Investment advice:
Based on the current business situation and development plan, we assume that the revenue growth rates of Guizhou Sanli's parent company from 2024 to 2026 are 15%, 15%, and 15% respectively (considering the company's core product's unique dosage form, high level of recognition, and continuous improvement in coverage); assuming that the revenue growth rates of Hanfang Pharmaceutical are 25%, 25%, and 25% respectively (considering the company's rich product line and strong marketing and promotion, core varieties such as Qiaojiao Shengwei capsules are expected to continue to grow rapidly); assuming that Dechangxiang's revenue growth rates are 40%, 35%, and 30%, respectively (considering the company's current revenue growth rate) (The base is relatively low, and core products such as gynaecologic reconstruction pills are expected to continue to grow rapidly after marketing and promotion efforts are strengthened).
Based on the above assumptions, we expect the company's revenue from 2024 to 2026 to be 2,428 billion yuan, 2,903 billion yuan, and 3.468 billion yuan, respectively, and net profit to mother of 346 million yuan, 425 million yuan, and 519 million yuan respectively. Referring to the valuation levels of Fangsheng Pharmaceutical and Kangyuan Pharmaceutical, the company was given a PE valuation of 25 times in 2024, corresponding to a target price of 21.00 yuan for 6 months, and an investment rating of Buy-A.
Risk warning: Risk of price fluctuations of Chinese herbal medicines, risk of mergers and acquisitions falling short of expectations, risk of marketing reforms falling short of expectations.