As the effects of the marketing reform of jade medicine gradually become apparent, it is expected that it will usher in an inflection point in performance
Overall performance in 2019 fell short of expectations: the company's overall revenue in 2019 fell 6.3% year on year to RMB 1,728 million. Considering increased competition in the pharmaceutical industry and major changes in medical reform policies, the Yuyao division focused on sales channel optimization in the second half of 2019, which led to a 48.1% year-on-year decline in its annual revenue to $324 million. The revenue of the Kangson division continued to rise steadily, up 15.1% year-on-year to $1,404 million. Gross profit decreased 8.9% year on year to 1,261 billion yuan, and gross margin fell 2.1 pp to 73.0% year on year, mainly due to rising raw material prices and declining sales scale of jade medicine. Sales expenses fell 4.0% year on year to 539 million yuan, and sales expenses ratio increased slightly by 0.7 pp to 31.2% year on year. Management expenses increased 31.3% year-on-year to $232 million, and the management fee ratio increased sharply by 3.8 pp to 13.4%, mainly due to impairment of receivables and management system adjustments during the year. Excluding the impact of impairment of goodwill and intangible assets, net profit of the mother declined 13.2% year-on-year to $404 million. Overall performance fell short of expectations.
The nephrology pipeline continues to develop in depth, and the new imaging product iodopanol contributed to the increase in new performance: during the period, uretic tablets increased 14.4% year-on-year to 1,062 million yuan, accounting for 61.5% of total revenue. In recent years, through continuous systems biology and evidence-based medical research, their product value and academic status have continued to improve. In addition, lanthanum carbonate and the new sugar kidney drug Astragalus are both scheduled to be marketed and sold within the next 3 years, further enriching the drug portfolio for nephropathy. In addition, iopanol, a self-developed variety of imaging pipelines, went on the market at the end of 2019, and has now been successfully connected to the Internet in Tianjin, Jiangxi and other places. We believe that as the epidemic improves, the speed of admissions bidding will gradually accelerate. At the same time, considering that the company has more than 20 years of sales experience in the contrast agent sector and that iodopanol has entered first-line clinical use at the end of April this year, its sales are expected to break 100 million within the next 3 years, contributing to additional volume.
The effects of the Jade Pharmaceutical marketing reform are expected to gradually become apparent: influenced by changes in industry policies, the Yuyao division focused on sales channel optimization and terminal construction in the second half of 2019, mainly including system rectification such as inventory removal, payment of receivables, and expansion of storage and sales channels. Although the transformation of the “brand+channel+terminal” sales model has put pressure on Yuyao's performance in the short term, considering that the quality and volume of end customers are expected to improve, it is beneficial to the development of the Yuyao segment in the long run. In addition to this, cooperative development of the old factory area in Yulin is progressing steadily. It has now entered the practical stage. It is expected to contribute 700 million yuan in profits to the company within 3 years, and the Yuyao division will enter a stage of healthy growth in the future.
Adjust the target price to HK$6.00, purchase rating: Considering that kidney disease and other major pipelines continue to advance steadily, we think the company is expected to resume endogenous growth within the next 3 years, and the profit level is expected to continue to rise. We adjusted our profit forecast for 2020-2022, adjusted the target price to HK$6.00, corresponding to a price-earnings ratio of 12 times in 2020, and maintained the buying rating.