CR SANJIU MEDICAL&PHARMACEUTICAL(000999)：A LEADING PLAYER IN THE HEALTHCARE INDUSTRY;UPBEAT ON THE GROWTH POTENTIAL OF THE CHC BUSINESS

What's new
We recently visited CR Sanjiu Medical & Pharmaceutical's headquarters in Shenzhen; spoke with the chairman of the board of directors, the secretary of the board, and chief financial officer; and visited the firm's factory and intelligent manufacturing center to gain a deeper understanding of its business operations. We think are upbeat on the growth of its consumer healthcare (CHC) business, and expect the company to become a leading player in the healthcare industry.
Comments
Distribution channel reform and product category expansion have become the new logic behind the growth of the CHC business.
Distribution channel reform: The rapid development of the online to offline (O2O) and business to consumer (B2C) models has mitigated the information asymmetry in the drug retailing market. Given consumers' increasing willingness to purchase drugs with well-established brands, we think that over-the-counter (OTC) drug brands will likely resolve the deep-seated problem of end-market outlets' tendency to urge consumers to buy high-gross-margin drugs. CR Sanjiu has utilized new distribution channels and new models, building its presence in multiple digitization channels and empowering traditional drug stores. We think that the combination of the strong brand strategy and the strong pharmacy chain strategy will likely become a trend, and CR Sanjiu may continue to gain market share.
Product category expansion: CR Sanjiu's CHC business segment consists of OTC, specialty, chronic disease remedy, and healthcare departments. Following the "omni-presence and leadership" strategy, the company offers the 999 brand series (which includes cold, gastrointestinal, and dermatological remedies) and has expanded its presence to OTX drugs (such as hepatobiliary, pediatrics, orthopedics, and gynecological drugs), health management, and chronic disease treatments to meet consumer demand. It is becoming increasingly difficult to build a new OTC brand that is famous nationwide, after the era of China Central Television ads and marketing has given way to fragmented new media marketing. We think that the value in the rarity of the Sanjiu brand will increase, its product category expansion initiative will pay off, and the firm will increase its growth potential.
Formula granule market opens up; the firm's prescription drug business will likely maintain rapid growth. The traditional Chinese medicine (TCM) granule market has opened up since the end of pilot project period. We think that competitors will emerge after the opening-up of this market, and that delicacy management and cost control are crucial to the TCM granule business. CR Sanjiu is one of the six companies to conduct pilot projects, and it has gained first-mover advantage. The firm has integrated intelligence and automation in its supply chains. It has built many Chinese medicinal crop planting bases (and also cooperates with other companies to build such bases). We expect the firm to gain share in the TCM granule market.
Equity incentive plan shows management's confidence in the company's development. On December 1, CR Sanjiu announced its restricted equity incentive plan. The conditions for execution are that the firm's attributable net profit should grow at a CAGR of at least 10% over 2022-2024 compared with 2020, and should remain in the 75% percentile of comparable companies (Yunnan Baiyao, Tong Ren Tang, Baiyunshan Pharmaceutical, and other 12 companies). We are upbeat that the incentive plan will fully motivate the firm’s management and core employees, thus supporting the healthy and rapid growth of the company.
Valuation and recommendation
We keep our EPS forecasts at Rmb2.05 for 2021 (up 25.5% YoY) and Rmb2.36 for 2022 (up 15.3% YoY) unchanged, and introduce our EPS forecast at Rmb2.77 for 2023 (up 17.4% YoY). We maintain an OUTPERFORM rating, but lift our target price by 29.7% to Rmb48.00 as: 1) the firm's current valuation is lower than the industry average (the stock is trading at 15.9x 2022e P/E, while the TCM sector is trading at 26.7x 2022e P/E); and 2) value in the rarity of its brand may increase and its valuation will likely repair. Our TP implies 20.3x 2022e P/E, offering 28.2% upside.
Risks
Raw material prices fluctuate; expansion initiatives proceed more slowly than expected.
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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。