Investment advice
In April 2018, we published the company's in-depth report “Reforming Industry and Commerce Ushers in New Development Opportunities” 1.
In April 2022, the company introduced a 10 billion yuan fixed increase project with strategic investors from Yunnan Baiyao. In 2023, the company's commercial sector launched the North-South resource integration campaign, and the industrial sector innovated and changed marketing ideas. We believe: 1) the company's new management has taken office one after another since 2023, and internal reforms have progressed steadily; 2) the business structure of the company's industrial and commercial sector has been continuously optimized; 3) the company has gradually entered a new era of innovation-driven industrial and commercial transformation and development.
rationales
Industrial sector: The traditional Chinese medicine sector is expected to usher in new vitality, and the product line is expected to continue to be enriched. In 2023, the company's industrial sector revenue was 26.3 billion yuan, of which 60 key varieties achieved revenue of 14.9 billion yuan. In terms of traditional Chinese medicine, the company announced a total of 16 key varieties with sales exceeding 100 million in 2023. The company continues to focus on the secondary development of specialty varieties and the cultivation of large varieties. In terms of complex formulations, the company has a rich variety of products, and we believe it is expected to support the steady growth of the company's formulation business. In terms of rare diseases, the company announced a total of 21 varieties and 16 ongoing research projects as of 2023, striving to become the leading enterprise of rare disease drugs in China. We believe that the company is improving competitiveness by promoting cost reduction and efficiency, and seeking change through marketing innovation.
Innovative drugs: R&D investment continues to increase, leading to breakthroughs in the research pipeline. The company's total R&D investment in 2023 reached 2.6 billion yuan, accounting for 9.9% of industrial revenue. The company carries out strategic cooperation with well-known pharmaceutical companies, research institutes and other parties to create an original incubation and clinical platform for innovative drugs. According to the company announcement, as of 2023, the company has launched 3 Class 1 drugs, with a total of 55 innovative drug pipelines.
Business sector: Stable leading position in the industry, actively exploring diversified innovative service systems. In 2023, the company's commercial segment revenue was 233.8 billion yuan, up 14.0% year over year. According to the Ministry of Commerce, the company's main business revenue in 2022 accounted for 10.8% of the total market size, and we believe that the company's commercial market position is expected to strengthen.
The company creates advantages in the import business. Actively lay out non-pharmaceutical health businesses. By the end of 2023, the company had completed more than 300 SPD projects, and the medical and aesthetic business grew rapidly. Furthermore, the company has built China's leading “Internet+” pharmaceutical business technology platform through Shanghai Pharmaceutical Cloud Health and Meixin Health.
Profit forecasting and valuation
We keep the company's 2024/2025 EPS 1.30 yuan/1.43 yuan unchanged. The current A-share price corresponds to the 2024/2025 price-earnings ratio of 14.9/13.6 times, and the H share price corresponds to the 2024/2025 price-earnings ratio of 8.1 times/7.3 times. Considering that the company's high valuation innovation pipeline and business are expected to be realized, we maintained the A-share industry rating and raised the target price of 5.9% to 23.3 yuan, corresponding to the 2024/2025 price-earnings ratio of 17.9 times/16.3 times, with 20.1% upside compared to the current stock price. Considering the decline in the valuation center of the Hong Kong stock industry, we maintained that H shares outperformed the industry rating and target price of HK$14.7, corresponding to the price-earnings ratio of 10.2 times/9.2 times in 2024/2025, with 26.5% upside compared to the current stock price.
risks
The price reduction for collection was greater than expected, new business development fell short of expectations, and R&D progress fell short of expectations.