Key points of investment
One-sentence logic
Tong Ren Tang is a leading state-owned traditional Chinese medicine company that mainly sells out of hospital. Reversal in performance and lack of funding are expected to lead to continuous restoration of valuation.
Logic that exceeds expectations
Market expectations: 23Q4 performance falls short of expectations. The market has doubts about the sustainability of the company's long-term growth. We predict that there is strong certainty that the volume and price of the core product, Yasumiya Gyuhuang Pills, has risen sharply, and the key product, the Wuzi Yanzong series, is becoming a new performance growth point (1) The volume and price of the core product, Angong Gyuhuang Pills, has risen sharply. Tongrentang Angong beef yolk pills have strong raw materials and brand barriers. Not only do they have the only right to use wild musk in the country, but they also account for about 48% of the retail terminal market, far exceeding other competitors (Zhongkang Kaisi 2023 statistics); the continuous rise in the price of natural beef yolk provides them with conditions for price increases. Furthermore, as the drug of choice for cerebrovascular diseases in the retail market, Angong beef yellow pills have profoundly benefited from an aging population and are highly sustainable in dosage.
(2) The key variety, the Wuzi Yanzong series, is growing rapidly. The company has stepped up its publicity and promotion efforts, broadened e-commerce sales channels, and promoted cooperation on O2O drug purchase scenarios and drug platforms to accurately target consumer groups through hot spots such as Hupu, World Cup, and Asian Games; the sales volume of the Wuzi Yanzong series in 2023 has surpassed the Liuwei Dihuang series and the Jinqu Renqi series, making it the company's third largest single product and the largest supplement product.
(3) Sales of cultivated varieties of Ganoderma lucidum spore powder are picking up. In '23, Tongrentang Sinopharm cleared the domestic channel inventory of Ganoderma lucidum spore powder, leading to -70.2% year-on-year sales revenue. Sales are expected to pick up in '24.
Inspection and catalysis
(1) The 24Q1 results got off to a good start. Net profit to mother achieved double-digit growth under the high base for the same period last year, which is expected to gradually resolve market concerns about the pressure on the company's performance; the base pressure for the next three quarters of '24 will be even less, and the performance growth rate may increase quarterly.
(2) The shareholders' meeting is expected to be held in June '24, and expectations for the company's potential state-owned enterprise reform are strong.
Target price and calculation basis
The company is an old state-owned Chinese medicine leader. The core products have the power to rise rapidly in volume and price. The average PE in the past 3/5/10 was 41.44x/38.33x/38.95x, respectively; considering that the company has the characteristics of “strong brand power+minimal adverse effects by policy+potential state-owned enterprise reform potential”, the company should enjoy a higher valuation premium. Currently, the company has not changed downward. Combined with shareholders' meeting catalysts and fund shareholding ratio of only 14.01% (as of the end of 23, including ETF and other index funds), the target market for 2024 is 42x42x/38.95x The value is 79.9 billion yuan, corresponding to an increase of 31.02%.
Profit forecasting and valuation
We expect 2024-2026 net profit of 19.03/22.05/25.37 billion yuan, an increase of 14.06%/15.86%/15.04% year-on-year, and EPS of 1.39/1.61/1.85 yuan, corresponding to PE32.05x/27.66x/24.05x.
Risk warning
Policy adjustment risk, raw material price increase risk, state-owned enterprise reform process falls short of expectations