DONG-E-E-JIAO(000423)INITIATION：A CENTENNIAL HEALTH TONIC BRAND ON THE JOURNEY OF REVITALIZATION

　　Dong-E-E-Jiao (DEEJ), a renowned health tonic brand with a nearly century-long history, exhibited a slowdown in earnings from 2006 to 2018. This can be attributed to inventory buildup within distribution channels following successive price hikes for its core blood tonic product, donkey hide gelatin (ejiao) cubes. However, the inventory structure is now more reasonable, and its operating indicators have been optimized, pushing its earnings to stabilize and rebound. In 2023, the Company plans to rejuvenate its operations by focusing on product R&D, channel optimization, and management enhancement. With deep cultivation in its primary business of ejiao, it aims to establish a business model driven by both pharmaceuticals and health products, exploring new product categories under the framework of "ejiao+" and "+ejiao". We anticipate steady improvements in earnings and forecast 2023E/2024E/2025E EPS of Rmb1.48/1.77/2.11. We initiate coverage with a "BUY" rating.
　　Company overview: On track for earnings recovery.
　　Established in 1952 as Shandong Dong-E-E-Jiao Factory, DEEJ has evolved into a leading player in the market since its listing on the Shenzhen Stock Exchange in 1996. With ejiao as its core product, the Company has diversified its product portfolio. DEEJ has achieved significant milestones, becoming the top product in the over-counter-counter (OTC) market (pharmacy stores) and the leading brand in the health tonic sector (according to the Company's announcements). DEEJ had exhibited a slowdown in earnings earlier due to inventory buildup within distribution channels in the wake of successive price hikes for ejiao cubes. However, destocking is largely completed now, and its operating indicators have been optimized, pushing its earnings to stabilize and rebound. In 2022, the Company reported revenue of Rmb4.042bn, up 5.0% YoY, and attributable net profit (ANP) of Rmb780mn, up 77.1% YoY. With China Resources Pharmaceutical Group serving as its controlling shareholder, the Company has a stable and well-defined equity structure.
　　Industry analysis: DEEJ is reinforcing its market position during the recovery of the health tonic industry.
　　In the post-Covid-19 era, there has been an increased emphasis on health and fitness, leading to rising demand for health tonics. The Chinese government has also implemented supportive policies to foster the development of the traditional Chinese medicine (TCM) industry, which may create a more favorable market landscape for the industry. Ejiao, made from the gelatinous substance extracted from donkey hides, has been recognized as a revered blood tonic in the Compendium of Materia Medica (an encyclopedic gathering of traditional Chinese medicine published in the late 16th century). According to statistics from CMH Sinohealth, ejiao products account for over 50% of the blood tonic market, with cubes being the most popular form. Although the industry experienced a slight downward trend due to reduced consumer spending power during the pandemic, DEEJ, as the industry leader, has maintained its dominant market share. The brand enjoys strong customer loyalty, surpassing its competitors in terms of market share and penetration rate. As the industry stabilizes, DEEJ's revenue growth has also stabilized and rebounded, boding well for steady improvements in its market position and potential in the industry. However, it's important to note that the supply of raw materials, particularly high-quality donkey hides, continues to tighten. The decreasing stock of quality donkeys in China suggests that domestic donkey hide prices are likely to steadily increase in the future.
　　Diversifying the product portfolio to build a second growth curve.
　　Currently, the Company generates a significant portion of its revenue from ejiao and ejiao series, including ejiao cubes, compound ejiao syrup, and health food items like ejiao cakes and powder under the Taohuaji brand. 1) Ejiao cubes: Positioned as a high-end product with strong competitive barriers, ejiao cubes are likely to achieve steady growth following proactive initiatives like effective destocking and controlled restocking via distribution channels. 2) Compound ejiao syrup: This product is a tonic for both qi(defined in TCM as the vital energy that circulates through the body at all　times) and blood replenishment. According to Menet, compound ejiao syrup was the second-largest blood tonic medicine after ejiao cubes in 2022. DEEJ is actively exploring new applications for compound ejiao syrup, particularly in relation to cancer-related fatigue. Breakthroughs in research have been achieved, and the Company plans to promote clinical studies to expand sales via hospitals. This strategy will boost both online and offline sales. 3) Health products: DEEJ targets the consumer group of young women with the Taohuaji brand. By strengthening brand marketing and introducing new products, the Company aims to boost both online and offline sales, which may help stabilize and enhance revenue in this segment. In line with its 2023 plan disclosed in the 2022 annual report, DEEJ will seize new opportunities in the TCM sector by focusing on its core business of ejiao while establishing a business model driven by both pharmaceuticals and health products. Under the framework of "ejiao+" and "+ejiao", it aims to branch out into categories related to gynecology, liver and kidney function, and orthopedics.
　　Optimizing R&D, distribution channels and operations for rejuvenation.
　　In 2023, DEEJ is committed to further enhancing its product development, distribution channels, and management capabilities. In terms of R&D, the Company plans to increase its investment in R&D, expand the R&D team, and reinforce the development of its medical expert system as well as clinical research, particularly evidence-based medical research in areas such as cancer-related fatigue, anemia during pregnancy, and sleep improvement. To bolster its R&D capabilities, the Company has established collaboration mechanisms with numerous research institutes and universities globally and has brought in talented professionals from relevant fields. In terms of distribution channels, the Company has initiated a brand awakening campaign to reconnect with existing customers by combining effective marketing and sales strategies. Moreover, DEEJ is intensifying its efforts in online channels and digital marketing innovation. This includes leveraging platforms like Douyin and Xiaohongshu and collaborating with new brands, such as Nayuki, to engage with young customers and promote the scientific aspects of ejiao products through endorsements by celebrities and doctors. In terms of operational management, with a new management team boasting impressive credentials, the Company anticipates a rejuvenation of its operations. Notably in 2022, DEEJ underwent its most significant organizational optimization in 70 years, aimed at enhancing overall organizational effectiveness.
　　Potential risks: Lower-than-expected sales, fluctuations in raw material prices or limited availability of donkey hides, challenges in marketing new products, intensified competition beyond expectations, and changes in healthcare policies.
　　Investment recommendation: DEEJ, a renowned health tonic brand with a nearly century-long history, exhibited a slowdown in earnings from 2006 to 2018. This can be attributed to inventory buildup within distribution channels following successive price hikes for its core product of ejiao cubes. However, the inventory structure is now more reasonable, and its operating indicators have been optimized, pushing its earnings to stabilize and rebound. In 2023, the Company plans to rejuvenate its operations by focusing on product R&D, channel optimization, and management enhancement. With deep cultivation in its primary business of ejiao, it aims to establish a business model driven by both pharmaceuticals and health products, exploring new product categories under the framework of "ejiao+" and "+ejiao". We are optimistic about the Company's continued improvement in earnings and put our forecasts for 2023E-2025E ANP at Rmb965mn/1,157mn/1,379mn, corresponding to EPS of Rmb1.48/1.77/2.11.Factoring in the 2023E PE multiples of comparable companies, at 40x on average or 54x for Taiji Industry (600129.SH), 48x for Beijing Tongrentang (600085.SH), 38x for Da Ren Tang (600329.SH), and 22x for CR Sanjiu (000999.SZ) based on Wind consensus estimates, and considering DEEJ’s leading position in the health tonic sector, we assign a valuation premium and arrive at a target price of Rmb62 on 42x 2023E PE. Based on results from the relative and absolute valuation methods, we initiate coverage with a "BUY" rating and a target price of Rmb62.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。