Dispensing machine helps the market expansion of formula granules, and Chinese traditional medicine takes the lead in layout

[China Pharmaceutical network enterprise news] at present, Chinese traditional medicine provides dispensing machine equipment and system to large hospitals free of charge Because dispensing machine is specially designed for dispensing granule products of Chinese traditional medicine, it sets a higher threshold for later competitors and sets a higher replacement cost for hospitals With more dispensing machines equipped to the hospital, Chinese traditional medicine can gain the first mover advantage and occupy the market share first According to the research report released by Huili securities, the business performance of Chinese traditional medicine in the first half of 2017 was strong With the dispensing machine assembled to more hospitals, the company is further consolidating its market position and preparing for the competition of hospital terminals in the future At the same time, the whole industrial chain layout of the company continues to advance with the merger and acquisition of upstream and downstream Huili securities is optimistic about the good prospect of TCM formula granule business, maintaining the "buy" rating with a target price of HK $5.70 (current price as of October 19) strong semi annual report performance: in the first half of 2017, the company's sales revenue was 38.99 billion yuan, up 22% year on year, realizing a net profit of 662 million yuan, up 21.6% year on year Huili securities noted that the traditional Chinese medicine formula granule business, accounting for 65% of the operating revenue, achieved a year-on-year growth of 23.8%, while the proprietary medicine business increased slightly, with a year-on-year growth of 3% In the first half of the year, the gross profit rate of the company fell by 1.7 percentage points, which was mainly caused by the rising price of raw materials and the low gross profit rate of new business (herbal pieces and large health industry of traditional Chinese Medicine) Although the inventory turnover days of traditional Chinese medicine formula granule business increased significantly (up 110 days on a year-on-year basis), sufficient raw material reserves played a positive role in helping the company mitigate the risk of gross profit decline At the same time, due to the issuance of RMB 4.5 billion bonds in 2016 and 2017, the financial expenses in the first half of 2017 increased significantly to RMB 85 million, a year-on-year increase of 149.4% Dispensing machine helps the market expansion of formula granules The company's traditional Chinese medicine formula granule products are mainly sold through unilateral packaging and dispensing machine At present, unilateral packaging still accounts for about 70% of the sales volume of formula granule business, but in the first half of the year, the sales revenue from dispensing machine grew rapidly, up 65.7% year on year Huili securities learned from the company's management that the company currently provides dispensing machine equipment and systems to large hospitals free of charge Because the dispensing machine is specially designed for Chinese traditional medicine formula granule products, it sets a higher threshold for later competitors, and also sets a higher replacement cost for the hospital As of June 30, 2017, the company has equipped 3072 dispensing machines for 1740 hospitals Huili securities expects that with more dispensing equipment to the hospital, the company can gain the first mover advantage and occupy the market share first The company's sales network continues to optimize At present, a worry in the market is that with the implementation of the two ticket system, the distribution channels of agents will be affected, which is not conducive to the sales of manufacturers Huili securities noted that traditional Chinese medicine continued to improve the quality of the sales network of its two main businesses In traditional Chinese medicine formula granule business, the proportion of sales revenue from primary medical institutions and secondary hospitals continued to rise At the same time, the company reduced the proportion of agent sales, which decreased from 24.6% in the same period last year to 20.2% in the first half of this year In terms of patent medicine business, Huili securities noted that the number of primary distributors of the company increased significantly, and the proportion of secondary and primary distributors continued to decrease In the long run, Huili Securities believes that a flatter sales pipeline will help the company strengthen its control over end customers The patent medicine business has recovered and it is worth looking forward to creating new products In the first half of the company's proprietary medicine business, the sales revenue was 1.14 billion yuan, an increase of 3% year on year, and the operating profit margin increased (1h16:18.9%, 1h17:21.6%) Among them, the sales revenue of Xianlinggubao capsule, the main product, increased by 32% year-on-year, mainly due to the cancellation of its OTC logo by the state and the company's controlled delivery due to the change of packaging, resulting in a decrease in sales volume In the aspect of medicine business, the company will adopt the strategy of large variety cultivation in the future, upgrade the packaging of strategic products, and cover more terminal chain drugstores The packaging upgrade of OTC products is conducive to establishing a better brand image and enhancing competitiveness, and the new packaged products will also be sold at a higher price However, Huili securities is still worried that the negative impact of the drug "zero plus" policy and the second price negotiation will continue to appear in the drug business Huili securities expects that although it is difficult to achieve high growth in the patent medicine business, a small steady growth can still be expected Rapid growth of new business and building a complete industrial chain Huili securities noted that a complete industrial chain built by traditional Chinese medicine running through the upstream and downstream has been formed and continues to grow In 2016, the company completed the acquisition of two pieces of decoction enterprises (Tongjitang in Guizhou and Tongjitang in Shanghai), and continued to expand upstream business through a series of measures, strengthen the control of raw materials, and further guarantee the demand of raw materials for the production of traditional Chinese medicine formula granules Although Chinese Herbal Pieces currently account for only 5% of the sales revenue in the first half of 2017, the growth of this sector is very rapid At the same time, the company continued to upgrade the production line, expand production capacity, and build new plants in Zhejiang, Shandong and other places The company plans to expand the capacity of Chinese herbal pieces and formula granules, and the annual output value will reach 20 billion yuan after the completion of construction In the downstream, the company completed the acquisition of 60% ownership of Guizhou Tongjitang pharmacy chain in the first half of 2017, further expanding the sales network With the strengthening of the control over the hospital and chain drugstores, Huili securities expects the company to achieve better leap forward development in the future The valuation model of Huili securities shows that the target price is HK $5.70: China's traditional Chinese medicine continues to strengthen its control over the upstream industry, expand production capacity in the midstream and improve the quality of the sales network in the downstream Huili securities maintained its "buy" rating accordingly, with a target price of HK $5.7 Original title: "caution machine" of Chinese traditional medicine: sales growth of dispensing machine exceeds 60%