Investment logic
Brand+product+channel create a moat for company development. As the leading OTC brand, the company's vision is to “become a leader in the mass medicine and health industry”. It is committed to becoming the number one brand in China's pharmaceutical and health care. Its main business is positioned in the field of CHC health consumer products and prescription drugs, covering the fields of colds, gastrointestinal, skin, hepatobiliary, cardiovascular, anti-tumor, and pediatrics. Relying on the influence of the “999” main brand and using the “1+N” strategy, the company has successively developed brands recognized by consumers such as “Tianhe”, “Shunfeng”, “Aonuo”, and “777”, and continues to cultivate large products through systematic brand operation. As of 2023, the company has 39 products with annual sales of over 100 million. In addition, the company has a mature sales team. 39 Commercial Road has covered more than 400,000 pharmacies and thousands of hospitals across the country, and is actively exploring the Internet pharmacy and medical market.
The CHC business is progressing steadily, and the prescription drug business is expected to gradually resume. In terms of CHC business, as the number one OTC manufacturer in the country, CHC business revenue increased from 4.380 billion yuan in 2015 to 11.707 billion yuan in 2023, with a CAGR of 13.1%, which is a very steady growth. Among them, the OTC business of the Flu Ling, Anti-viral Oral Solution, Xiaochaihu Granules, and Dermatitis Equality brands grew significantly in 2023; professional brand products such as Aunuo Glucoconate Calcium Zinc Oral Liquid and Yi Shanfu continued to build a brand system to accelerate collaboration between the medical side and retail side, and also achieved relatively rapid growth. In terms of the prescription drug business, revenue of 5.220 billion yuan was achieved in 2023, a year-on-year decrease of 12.64%. Mainly, the performance of the traditional Chinese medicine formula granule business was significantly lower than expected due to the switching of national standards and inter-provincial joint procurement. Over the long term, the company will continue to increase investment in R&D and enrich its product line to improve gross margin and maintain the steady development of the collection business. Combined with favorable factors such as medical insurance relief restrictions for traditional Chinese medicine injections, the company's prescription drug business is expected to remain stable overall in 2024.
The epitaxial merger and acquisition stimulated the company's vitality and entered the Kunyao ageing circuit. Since 2008, the company has successfully initiated more than 15 epitaxial mergers and acquisitions as new contributions, consolidating its position in the industry and entering new fields, mainly enterprises such as Jinchan Biochemical, Hefei Shenlu, Guangdong Shunfeng Pharmaceutical, Guilin Tianhe, Zhejiang Zhongyi, Kunming Shenghuo, Shandong Shenghai, Aonuo Pharmaceutical, Kunming Pharmaceutical Group, Runsheng Pharmaceutical, etc., which have enriched many therapeutic product lines and stimulated growth vitality. After the merger and acquisition of Kunming Pharmaceutical in 2022, the company carried out deep integration with it to empower the 37 industry and the core business of Kunming Traditional Chinese Medicine through brand power and channel power. In March 2024, China Resources Shenghuo and Kunming Pharmaceutical Group jointly launched the “777” brand. Based on 37 products, “777 Liangwang” and “777 Luotai” Hesketong softgels are the best natural medicines for cardiovascular and cerebrovascular prevention. In the future, they will expand more geriatric health brand products and strengthen the company's layout in the field of health.
Profit forecast: The company's core advantages such as brand, products, and channels are obvious, and a platform-based company is built through an “endogenous+extension” model. The operation of the “1+N” brand has driven steady growth in the CHC business, and the risk of collecting prescription drugs has gradually bottomed out, which is expected to usher in a rebound. After the merger and acquisition of the Kunming Pharmaceutical Group, the company is expected to have a synergy effect with the 37 industry and Kunming Traditional Chinese Medicine, providing impetus for performance growth. We expect that in 2024-2026, the company will achieve revenue of 278.16/306.72/33.835 billion yuan, a year-on-year increase of 12.44%/10.27%/10.31%, net profit to mother of 34.68/39.51/421 billion yuan, an increase of 21.56%/13.93%/14.43%. The corresponding PE is 18/16/14 times, respectively, giving it a “recommended” rating.
Risk warning: risk of price reduction in product collection, risk of changes in industry policy, risk of raw material price fluctuations, risk of mergers and acquisitions falling short of expectations, risk of market competition worsening risk, risk of new product development falling short of expectations, risk of market development and brand building falling short of expectations, product quality risk, etc.