Events:

The company released its 2018 annual report and quarterly report on the evening of April 24. In 2018, revenue reached 1.264 billion, an increase of 1.46% over the same period last year, and a net profit of-341 million, a decrease of 203% over the same period last year. Realized deduction of non-return net profit of-358 million, a decrease of 212% over the same period last year. Revenue in the first quarter of 2019 was 193 million, down 28.22% from the same period last year, and net profit was 52 million, down 47.01% from the same period last year. The performance was lower than expected.

Main points of investment:

Due to the impairment of maturity and the settlement of Teva, the performance was lower than expected.

The recent major changes in the company's management are as follows: 1) the performance of Chengji Pharmaceutical Industry is lower than expected: in 2018, the revenue of Chengji Pharmaceutical Industry is 220 million (- 37.68%), of which 90 million (- 32.65%) is combined drug packaging and 105 million (- 50.23%) is injection pen. Chengji Pharmaceutical made a profit of 93 million in 2018, a decrease of 111 million compared with the previous year. At the same time, due to the lower-than-expected maturity, the current period set aside 529 million goodwill impairment, so that Hanyu's profit for the current period is lower than expected.

2) the sales of overseas raw material pharmaceutical products are under pressure. The company's 2018Q4 overseas sales were 65 million, down 44% from the same period last year. 2019Q1's overseas sales were 40 million, down 54 per cent from a year earlier. In Lilaru peptide products, as a result of the reconciliation between Novo-Nordisk A/S and Teva, Teva, which has made the fastest progress in imitation, was authorized to launch Lilaru peptide mimic at the end of 2023. The settlement affected the reporting strategy of some companies that reported Lilaru peptide imitation pharmaceuticals, resulting in a decline in overseas sales of Hanyu's APIs in the first quarter. The follow-up sales of Lilarutide APIs depend on the progress of overseas customers' declaration.

3) the preparation business has increased steadily. In 2018, the company's preparation revenue reached 725 million, an increase of 16.58% over the same period last year. Among them, Cabe and other varieties achieved an income of 87 million (+ 73.33%), somatostatin 239 million (+ 26.6%), and terlivasopressin 194 million (- 8.37%). The decline in somatostatin in the first quarter is expected to be mainly due to changes in the company's sales strategy, with low sales in some newly developed hospitals.

4) among the current sales expenses and management expenses, the one-time consulting fees increased by 84 million and 51 million respectively, which reduced the profits of the current period, and the expense rate is expected to decline in 2019.

Promote the declaration and consistency evaluation of Lilaru peptides in China.

In November 2018, Lilaluptide was approved to carry out the human bioequivalence trial. At present, the subject test and sample analysis, the inspection and review of clinical data, and the data locking database have been completed. After the complete data analysis results are obtained, the application stage of the production approval will be started. At present, Federal Pharmaceutical and Tonghua Dongbao have declared the clinical application of this variety, and the variety of East China Medicine is currently in the clinical III phase. As a chemical synthesis process rather than a fermentation process, the impurities of the product will be better controlled and the inter-batch stability will be better. The company promoted the consistency evaluation of the current 7 varieties, and the consistency evaluation of etioptide, somatostatin and other injections was accepted.

Maintain the recommended rating.

In view of the fact that the company is a leader in the field of chemical synthetic peptides, with a strong moat, impairment, short-term product volume is not as expected to change the company's long-term competitive advantage. It is estimated that the EPS from 2019 to 2021 will be 0.28,0.34 and 0.41 yuan respectively, corresponding to the closing price on April 24, the PE will be 40,33 and 27 times respectively, maintaining the "recommended" rating.

Risk hint

Overseas sales of Lilaru peptide raw materials are not as expected; domestic declaration of Lilaru peptide preparations is not as expected.