Incidents:
On April 19, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 6.733 billion yuan, a year-on-year increase of 12.21%, achieved net profit of 592 million yuan, an increase of 65.19% over the previous year, and realized deducted non-net profit of 554 million yuan, an increase of 14.60% over the previous year.
The performance was in line with expectations, and the business classification criteria were adjusted according to the development strategy.
Referring to the performance forecast announced in January 2024, the company expects to achieve operating income of about 6.735 billion yuan in 2023, expected to achieve net profit of 591-680 million yuan, and expected to deduct non-net profit of 538-604 million yuan. The final revenue scale is basically the same, and the net profit level falls within the forecast range, which is basically in line with market expectations. According to the development strategy, in 2023, the company readjusted its business classification standards to form an “integrated two-wing” product business position with all categories of traditional Chinese medicine products as the main body, specialty chemicals and specialty health consumer goods as the two wings.
(1) All kinds of traditional Chinese medicine business: In 2023, the company's all-category traditional Chinese medicine business achieved revenue of 3.625 billion yuan, an increase of 16.60%; among them, proprietary Chinese medicines (OTC+ traditional Chinese medicine prescription drugs) achieved operating income of 2,717 billion yuan, an increase of 13.45%; Chinese herbal medicines and Chinese medicine tablets achieved operating income of 851 million yuan, an increase of 26.79% year on year; Chinese medicine health products and traditional Chinese medicine extract business achieved operating revenue of 57 million yuan, an increase of 32.94% year on year.
(2) Specialty chemicals business: In 2023, the company's specialty chemicals business achieved revenue of 2,391 billion yuan, an increase of 2.98%; of these, chemical pharmaceutical preparations achieved revenue of 1,767 billion yuan, an increase of 2.92% year on year; APIs and veterinary drug formulations achieved revenue of 624 million yuan, an increase of 3.18% year on year.
(3) Featured consumer health products business: In 2023, the company's specialty health consumer goods business achieved revenue of 580 million yuan, an increase of 21.28% over the previous year.
We believe that since the actual controller of the company was changed to the Zhejiang Provincial State-owned Assets Administration Commission in 2020, the listed company has been positioned as the “Zhejiang Traditional Chinese Medicine Health Industry Master Platform”. After the business classification standards have been readjusted, the strategic focus is more clear and more in line with the company's future development direction.
Adhering to the “big variety, big brand” strategy, the core product, the Changyan Ning series, is growing rapidly.
The company adheres to the “big brand, big variety” strategy. In 2023, it sold a total of 17 product series over 100 million yuan, an increase of 2 over 2022. The total sales revenue for products with sales of 100 million yuan or more was 4.619 billion yuan, an increase of 12.93% over the previous year, accounting for 68.6% of the company's total revenue, an increase of 0.44pct over 2022. In the all-category traditional Chinese medicine sector, the company's core product “Kangenbei” brand enteric anti-inflammatory series products are the number one leading product in the domestic retail intestinal medicine market, with sales revenue of nearly 1.3 billion yuan in 2023, an increase of 28%; in the specialty chemicals sector, sales revenue of the company's core product “Jinkang Quick” brand acetylcysteine effervescent tablets increased 16% year on year, and sales revenue of the key cultivation product “Jinkang Lingli” brand galantamine hydrobromide tablets increased 55% year on year; in the specialty health consumer goods sector, “Kangenbei” brand health food sales revenue increased 5.7 percent year on year 100 million yuan, a year-on-year increase of 23% . According to the 2024 development plan, the company will continue to consolidate the sales scale of the Conn Bay Entering Series at the level of 1 billion, while striving to achieve sales levels 5-10 billion for 2 brand series products and 200-500 million for 5-6 products. We believe that the company has strong ability to build large single products, and the implementation of the “big variety and big brand” strategy is the cornerstone for the company to achieve steady growth and good profits.
Improve quality and efficiency and repay, and play the “increase holdings+repurchase+dividend” combo punch.
In recent years, the company has insisted on focusing on its main business and continuously improving quality and efficiency. On the one hand, it has acquired minority shareholders' rights in core subsidiaries and promoted full ownership of holding subsidiaries; on the other hand, it has implemented “slimming down and strengthening” actions to gradually divest and dispose of inefficient and ineffective assets. In 2023, the company completed the acquisition of minority shares in 4 subsidiary companies including the Health Technology Company, completed the disposal of inefficient land and real estate for 2 subsidiaries, and revitalized more than 65 million yuan in capital. The company responded to the national call, strengthened returns to shareholders through various forms, and played a “shareholder+repurchase+dividend” combo punch:
(1) Increase in holdings: On January 31, 2024, the company issued the “Notice Concerning the Controlling Shareholder's Plan to Increase the Company's Shares”. The controlling shareholder “Provincial Traditional Chinese Medicine and Health Industry Group” plans to increase its holdings of the listed company by 2-4% through centralized bidding. As of March 22, 2024, the increase in holdings has reached the lower limit of 2%.
(2) Repurchase: On January 27, 2024, the company issued the “Report on the Repurchase of Shares Using Centralized Auction Transactions”. It plans to use its own capital of 2-4 billion yuan to repurchase shares of listed companies to implement equity incentives. As of March 29, 2024, the company's cumulative number of repurchased shares reached 25.71 million shares, accounting for 1% of the company's total share capital, and the total amount of capital used reached 120 million yuan.
(3) Dividends: On February 7, 2024, the chairman proposed a cash dividend of 2.00 yuan (tax included) for every 10 shares to all shareholders in 2023. According to the “Notice on the 2023 Profit Distribution Plan”, a cash dividend of 504 million yuan (tax included) is expected to be distributed. The dividend ratio will reach 85.27% of net profit due to the 2023 closing price, with a dividend rate of 3.97%.
Investment advice:
Based on the company's development plan, we assume that from 2024 to 2026, the company's revenue growth rates for all types of traditional Chinese medicines will be 15%, 15%, and 15%, respectively, the revenue growth rates of specialty chemicals will be 6%, 6%, and the revenue growth rates of specialty health consumer products will be 20%, 20%, and 20% respectively. We expect the company's revenue from 2024 to 2026 to be 7.550 billion yuan, 8.481 billion yuan, and 9.545 billion yuan, respectively, and net profit to mother of 732 million yuan, 854 million yuan, and 992 million yuan respectively.
Considering the company's clear development strategy and emphasis on shareholder returns, refer to the valuation of comparable companies such as China Resources 39 and Jiangzhong Pharmaceutical, and give the company a 25 times PE valuation in 2024, corresponding to a target price of 7.00 yuan for 6 months, and an investment rating of buy-A.
Risk warning: Risk of price fluctuations of Chinese herbal medicines, risk of epitaxial mergers and acquisitions falling short of expectations, risk of price reduction in proprietary Chinese medicine & chemical drug collection.