Event

The company issued an announcement to acquire 28% of the shares of Kunming Pharmaceutical Group.

On the evening of May 8, the company issued a major asset purchase plan and other announcements, intending to buy 28% of the shares of Kunming Pharmaceutical Group in the form of cash. The equity transferor is Huali Pharmaceutical, the controlling shareholder of Kunming Pharmaceutical Group, and its concerted actor, Huali Group. the transfer price per share is 13.67 yuan, with a total transfer consideration of 2.902 billion yuan. After the completion of this transaction, Kunming Pharmaceutical Group will become a holding subsidiary of the company.

Brief comment

On May 6, 2022, Kunming Pharmaceutical Group became a holding subsidiary of the company. On May 6, 2022, the company signed a "share transfer agreement" with Huali Pharmaceutical, the controlling shareholder of Kunming Pharmaceutical Group, and its co-actor, Huali Group. The company intends to use 2.902 billion yuan in cash to acquire 209 million shares of Kunming Pharmaceutical Group held by Huali Pharmaceutical (27.56% equity). And acquired 333.5 million shares of Kunming Pharmaceutical Group held by Huali Group (equity ratio is 0.44%). After the completion of this transaction, the company will hold 212 million shares (28%) of Kunming Pharmaceutical Group and become the controlling shareholder of Kunming Pharmaceutical Group.

According to the "reorganization Management measures", this transaction is expected to constitute a major asset restructuring, but it is proposed to be paid in cash and does not need to be submitted to the China Securities Regulatory Commission for approval.

The transfer price per share of this transaction is 13.67 yuan, corresponding to PS 1.26 times (corresponding to 21-year income), PE is 20.42 picks 18.75 times (corresponding to the homing net profit of 211,22-year incentive target), 37.08 times the 22-year forecast non-net profit of 21max).

As it involves the transfer of control, this transaction has a certain premium, which is basically reasonable.

The acquisition is in line with the company's core strategy and strengthens CHC business capabilities. The company insists on taking healthy Consumer goods (CHC) as its core business. Prescription drugs continuously promote the "brand + innovation" two-wheel drive business growth model by cultivating brand thickness and building professional academic capabilities, improve CHC layout, and achieve high-quality global development. This time, around the core strategy, the company acquires the controlling stake of Kunming Pharmaceutical Group, which is beneficial for the company to integrate high-quality resources, supplement traditional Chinese medicine brands, realize the strategic goal of brand + innovation double-wheel drive development, and continuously promote the strategic goal of global development. for the company to promote "public medicine and health industry leader" to lay a good foundation.

After strategic adjustment in recent years, the proportion of oral preparations in Kunming Pharmaceutical Group has increased significantly, among which the series of Panax notoginseng and Sanjiu have obvious synergistic effect; at the same time, the brands and varieties of subsidiary Kunming traditional Chinese medicine have both advantages. The use of Sanjiu strong channel management and terminal coverage can also enhance its brand awareness and recognition.

① business structure continues to optimize, oral preparation, out-of-hospital business strong growth: in recent years, Kunming Pharmaceutical Group continues to deepen the "injection-oral", "prescription-retail" two-wheel drive strategy, promote the transformation and upgrading of marketing model, and actively create two bright spots of out-of-hospital market and oral products. The overall revenue structure of the pharmaceutical industry sector has been optimized in recent years: 2021. The company's oral sector realized business income of 2.891 billion yuan, an increase of 14.03% over the same period last year, and out-of-hospital business income of 1.867 billion yuan, an increase of 44.12% over the same period last year, accounting for 71.67% and 46.27% of the income of the pharmaceutical industry, respectively. In terms of categories, the company's two core brands of oral medicine: 1) Kunyao Xuesaitong oral series: continue to increase brand building, strengthen talent, resources and channel investment, and achieve sales revenue of 948 million in 2021, an increase of 18.80% over the same period last year. The core single Kunyao Xuesaitong soft capsule achieved sales of 593 million yuan, an increase of 28.28% over the same period last year, of which retail sales exceeded 190 million yuan, an increase of 135.80% In the past 22 years, Kunyao Xuesaitong soft capsule, the core product of Q1, has continued a trend of rapid growth in retail channels, with an increase of 75.12% over the same period last year. After the completion of the transaction, the company's subsidiary China Resources Saint Flame and Xuesaitong soft capsule products produced by Kunming Pharmaceutical Group had peer competition. China Resources Pharmaceutical Holdings, China Resources Co., Ltd. and China Resources Sanjiu all issued a letter of commitment on avoiding inter-industry competition to solve the above-mentioned competition problems in the industry. It is expected that the company will cooperate with Kunming Pharmaceutical Group in management and operation to integrate the resources of both sides and achieve complementary advantages, which is expected to reduce the market competition of Xuesaitong soft capsules and achieve good coordination. 2) "Kunming traditional Chinese Medicine 1381" boutique Chinese medicine series: continue to build spleen-strengthening digestion increment category, Kunming traditional Chinese medicine achieved sales revenue of 1.212 billion in 2021, year-on-year increase of 19.97% year on year Q1 three core products Shenling Jianpi granule, Shugan granule, Xiangsha Pingwei granule achieved steady growth driven by multi-dimensional resonance of large categories, strong brands and extension channels, and increased by 10.37%, 9.63% and 23.03% respectively compared with the same period last year. In addition, Kouyanqing pills and Jinhua Xiaocuo pills, which mainly focus on the new retail track, have achieved rapid growth of 43.93% and 280.31% respectively, becoming a new growth point in the Kunming traditional Chinese medicine product camp. After the completion of the transaction, the company will, on the basis of good brand operation ability, make use of the company's strong channel management and terminal coverage to assist Kunming Pharmaceutical Group to give full play to its traditional brand advantages and build a high-quality Chinese medicine brand of "Kunming traditional Chinese Medicine 1381". Continue to improve its brand awareness and recognition.

② continues to build Panax notoginseng resources development industrial system, coordinated development to achieve win-win situation: Kunming Pharmaceutical Group has a complete industrial chain from Panax notoginseng gap planting and slices processing to Panax notoginseng saponins extraction, preparation production, professional marketing and promotion, and establishes traceable intelligent management and control from planting, procurement, R & D, production, quality inspection to warehousing and logistics. In recent years, Sanjiu has also continued to expand the industrial chain of Panax notoginseng, improve the efficiency of production and operation, and supplement products in the field of chronic diseases through variety, quality and technology improvement, new product development and other ways. Previously, it has jointly initiated with Yunnan Provincial Institute of Science and Technology, Kunming University of Science and Technology, and Wenshan College to establish the Research Institute of Panax Notoginseng in Yunnan Province to expand the platform of Panax notoginseng industrial chain integrating R & D, production and sales to ensure the demand for medicinal resources. Improve production and operation efficiency. This transaction will help the two sides to give full play to the synergy around the resource development industrial system of Panax notoginseng and promote the common development of both sides; after the completion of the transaction, the company will undertake the development plan of Panax notoginseng industry in Yunnan Province. committed to building Kunming Pharmaceutical Group into a leading enterprise in the industrial chain of Panax notoginseng, and around its core plant resources such as Panax notoginseng and Artemisia annua, to promote the modernization and industrialization of traditional Chinese medicine.

Excellent merger and acquisition integration ability to support the company's core strategic development

Extension M & A has always been one of the core factors to promote the sustained growth of the company. The company has good terminal resources, which makes the company have the ability to gradually cultivate potential varieties into large varieties. In recent years, while strengthening external cooperation, the company has carried out many mergers and acquisitions in the strategic areas of anti-tumor, anti-infection, cardio-cerebrovascular, paediatrics, orthopaedics, dermatology, digestion, tonifying, heat-clearing and detoxification, and so on. So far, many high-quality varieties have been obtained, many of which have become large varieties with sales of more than 100 million. As a scarce multi-brand successful operation platform, the company has the experience of integrating high-quality resources in the industry, and the team ability is also improving. We believe that with the acquisition of shares in Kunming Pharmaceutical Group, the company will make use of its rich management experience and industrial resources to empower Kunming Pharmaceutical Group, further improve operational efficiency and competitive advantage, and achieve win-win results through coordinated development between the two sides.

Sufficient capital reserves and high quality cash flow support the healthy operation of the company.

By 2022 Q1, the company has 3.44 billion yuan in book currency and 1.171 billion yuan in transactional financial assets, totaling 4.611 billion yuan. The existing capital reserves are sufficient. It is expected that this transaction will not affect the daily production and operation of the company. In addition, the company has a strong hematopoietic ability, and the operating net cash flow has basically shown a trend of steady growth in recent years. In 2021, the operating net cash flow reached 1.871 billion yuan, accounting for 12.21% of the operating income.

Impact on corporate earnings: if a successful merger, the impact is expected to be limited in 22 years, and there will be a significant increase in 23 years. In terms of time schedule, as this transaction still needs to be submitted to the general meeting of the company's shareholders and approved by the relevant regulatory authorities before it can be formally implemented, if the merger is successful, the impact on the company's performance in 22 years is expected to be limited, and 23 years is expected to make a positive contribution to the company's performance.

Profit forecast and investment rating

As this transaction still needs to be submitted to the shareholders' meeting of the company for consideration and approved by the relevant regulatory authorities before it can be formally implemented, and there is still some uncertainty, we maintain the company's profit forecast for 2022 in 2024. It is estimated that the operating income will be 17.602 billion yuan, 20.284 billion yuan and 23.338 billion yuan respectively, and the net profit of returning home will be 2.358 billion yuan, 2.715 billion yuan and 3.127 billion yuan respectively. Equivalent to EPS (diluted) is 2.41 yuan per share, 2.77 yuan per share and 3.19 yuan per share, an increase of 15.2%, 15.1% and 15.2% respectively over the same period last year, corresponding to PE of 16.1x, 14.0x and 12.1x respectively, maintaining the "buy" rating.

Risk analysis.

The progress of acquisition is lower than expected; the impact of policy changes in formula granules; policy risks such as limited resistance and collection; drug price reduction risk; raw material price fluctuation risk.