We believe that the investment logic of Xinhua Healthcare is mainly based on the following three points:
1. Streamline the interests of shareholders and managers, and pay attention to market value management.
1) The high proportion of state-owned shareholders participating in the fixed increase shows confidence in future development: the company issued a fixed increase of 54.9 million shares at 23.38 yuan/share, and Shandong Yiyang Health, the largest state-owned shareholder, subscribed 179.64 million shares (accounting for 32.72%), fully demonstrating confidence and support for the company's future development.
2) Equity incentives bind core talents and boost confidence: The incentive covers 345 core cadres (including the chairman, general manager, etc.), binds employees' interests to company development, and unleashes the vitality of state-owned enterprise reform.
3) Pay attention to high-quality investment communication and strengthen market value management: In its annual report, the company specifically stated “stabilizing performance to find highlights, reshape value and increase market value”, which will further improve investor communication work.
2. The business inflection point has been reached, gross margin is rising steadily, and there is plenty of room for improvement.
1) “Improving gross profit margin” has risen to the company's strategic level: since 2021, the company has insisted on “restructuring, strengthening the main business, improving efficiency, and risk prevention”, concentrating superior resources to focus on developing the medical device and pharmaceutical equipment sector, optimizing the company's product structure, and gradually increasing the gross margin level.
2) Gross margin has entered an upward channel: gross margin for the first three quarters of 2022 was 25.94%, 2019, 2020, and 2021 were 21.23%, 23.28%, and 24.25% respectively, and profitability continued to improve.
3) Product structure optimization+management efficiency improvement+continuous export breakthroughs. It is expected that gross margin will continue to increase and room can be expected.
3. Leading players in established devices have a rich heritage and current valuations are low, and there is plenty of room for state-owned enterprises to reform and reshape their valuations.
After 80 years of ups and downs, the company has a rich technological heritage. Through continuous national reform measures to improve the efficiency of operation and management, it is expected that various financial indicators will continue to improve. As the first stock in medical device state-owned enterprise reform, it meets the characteristics of the “China Special Assessment” target, and there is plenty of room for valuation to be reshaped upward.
The basic market of medical devices is rich, and the product line continues to be rich and high-end, enjoying the dividends of domestic substitution. It lays out nine major product lines, leading the advantages of sensory control and radiotherapy (domestic market accounts first), the most complete range of surgical instrument products (about 12,000 types), and has great potential for growth in laboratory equipment and instruments.
The profitability of pharmaceutical equipment has steadily picked up, and the international strategy has set sail. The company's self-developed BFS equipment breaks the import monopoly and can be widely used in the production of single-dose eye drops, inhalers, liquid hyaluronic acid cosmetics, etc. packaged in PE materials. The rise of internationalization has opened the ceiling for growth.
Profit forecast and valuation: We expect the company's net profit to parent in 2022-2024 to be 523 million yuan, 743 million yuan, and 932 million yuan, up -6.1%, 42.2%, and 25.4%, respectively. The PE corresponding to current stock prices is 24x, 17x, and 13x, respectively. We used the PE valuation method to value the company. The corresponding future target market value was 22.297 billion yuan, and the target price was 47.76 yuan. For the first time, it covered the “buy” rating.
Risk warning: New orders fall short of expected risks; fund-raising projects fall short of anticipated risks.