The company's recent situation
Recently, we organized a roadshow for Tongrentang Technology Management. We believe: 1) The company's new plant is put into use, and production capacity is expected to gradually recover in the second half of the year. 2) Starting this year, the company will continue to strengthen sales of key varieties.
reviews
The company's traditional Chinese medicine production base has initially formed a new pattern of Beijing+Hebei. The company's Hebei Tangshan base and Beijing Daxing branch successfully passed GMP certification in April and July 2019 respectively. The company began to gradually transfer production lines in the second half of 2019. We expect the company's production capacity to gradually recover in the second half of this year, and production is expected to return to the level of the end of 2018 by the end of this year. In 2019, due to the impact of the company's original production line requiring GMP re-certification and the time required for commissioning and operation of the two newly built production bases, the company's production volume of dosage products such as pills and liquid preparations was greatly affected, leading to a decline in production of leading varieties such as the Liuwei Dihuang pill series and the Jinqui renal gas pill series.
Ejiao currently accounts for less than 5% of the company's revenue. In 2019, the company's Ejiao products recorded a 1.56% increase. Currently, the channel inventory of the company's products has dropped to a normal level. Currently, the production capacity of the company's glue products (production base is located in Hebei) is sufficient. In the future, the company plans to strengthen the research and development speed of donkey skin Ejiao products and launch products such as Ejiao cake and Ejiao powder. Furthermore, the company plans to expand rubber products and resume production of rubber products such as antler glue.
Strengthen the layout of medical institution channels and other channels. In 2019, the company's OTC channel revenue accounted for about 80%, medical institution channels accounted for about 20%, and the sales team was about 900 people.
The company began channel reform in 2018 and set up a special OTC channel division, medical institution division, e-commerce division, and dealer division. The OTC Channel Division is mainly used to deepen cooperation with various top 100 pharmacy chain companies. After the establishment of the Medical Institution Division, the department promoted sales of varieties such as Nishihuang pills. In 2019, e-commerce channel revenue was about RMB 2-3 billion, and the company actively explored cooperation with e-commerce channels.
Valuation recommendations
We maintain our earnings forecasts of RMB 0.35 and RMB 0.37 per share for 2020 and 2021, corresponding to year-on-year increases of 5.9% and 7.3%, respectively. The current stock price corresponds to price-earnings ratios of 15.4 times and 14.3 times in 2020 and 2021. We maintain a neutral rating. Considering the recent upward shift in valuation center, we raised our target price by 4% to HK$7.10 (corresponding to 17.7 times and 16.5 times the price-earnings ratio of 2020 and 2021, with room for 15% increase from the current stock price).
risks
Depreciation pressure at the Daxing and Tamada bases.