According to the latest statistics from the China Pharmaceutical Enterprise Management Association, the value added of the pharmaceutical industry above scale in 2023 was about 1.3 trillion yuan, down about 5.2% year on year; enterprises above scale achieved operating income of nearly 3 trillion yuan, down 4% year on year; realized profit of 412.72 billion yuan, down 16.2% year on year. Compared with the growth rate of all three indicators of the industry as a whole, which showed negative growth for the first time, the proprietary Chinese medicine sector bucked the trend and showed outstanding performance.

Among the 9 sub-industries in the statistics, only 2 sub-industries, Chinese medicine tablets and proprietary Chinese medicines, achieved positive revenue and profit growth, with outstanding performance.

On the policy side, since 2021, the country has continuously issued relevant policies to accelerate the development of traditional Chinese medicine characteristics and revitalize traditional Chinese medicine. In February of last year, the “Implementation Plan for Major Projects for the Revitalization and Development of Traditional Chinese Medicine” was officially released. The document once again made it clear that inheriting, innovating and developing traditional Chinese medicine was an important part of the work during the 14th Five-Year Plan period. It also increased support and promotion for the development of traditional Chinese medicine, and the acceleration of the traditional Chinese medicine industry ushered in benefits.

Furthermore, in the 2023 edition of the medical insurance catalogue adjustment work, the number of proprietary Chinese medicines included in the national medical insurance catalogue reached 1,390. In the nationwide collection of proprietary Chinese medicines led by the Hubei Health Insurance Administration in July of last year, the average price reduction of selected varieties was only 49.36%. Whether it is included in the medical insurance catalogue or the collection and price reduction, it all shows support for the traditional Chinese medicine industry from the policy side.

In this context, the stock prices of both AH Chinese medicine companies have increased quite a bit, but there are still quite a few excellent targets that are both undervalued and fundamental. Kangchen Pharmaceutical (01681), whose 2023 financial report was freshly released, is one of them.

Hard-core financial indicators indicate an upward channel for value

The revenue and profit double harvest, with a dividend payout ratio exceeding 40%. This is the most intuitive information revealed to investors in Kangchen Pharmaceutical's annual report.

According to the Zhitong Finance App, in 2023, Kangchen Pharmaceutical continued the steady growth trend of performance, achieving operating income of 2.59 billion yuan (unit, same below), up 10.7% year on year; gross profit of 1.92 billion yuan, up 9.0% year on year; gross margin of 74.2%; net profit to mother of 785 million yuan, up 14.9% year on year.

Although the external market environment continued to fluctuate in 2023, key financial data showed that Kangchen Pharmaceuticals still achieved steady growth in profitability, and the company maintained a consistently high level of dividends. During the reporting period, the company's basic profit per share was $0.99, up 15.1% year on year; dividend per share was HK$0.45, up 50.0% year on year; dividend ratio reached 42.1%.

Looking at peer comparison, as of March 26, out of 73 A-share listed Chinese medicine companies, 16 have now officially disclosed their 2023 annual reports, and 14 of them have achieved a positive year-on-year increase in net profit to their mother.

Compared with A-share Chinese medicine companies, Kangchen Pharmaceutical's current net profit is far higher than the peer's median level of 173 million yuan. Moreover, the company's current ROE level of 23.17% and the share of R&D expenditure are also at the upstream level of the same industry, and the dividend rate has basically remained around the median level of peers.

Looking at the Hong Kong stock market, there are currently 11 listed Chinese medicine companies in the Hong Kong stock market. A total of 8 companies have disclosed their 2023 report results. Compared with these few companies, Kangchen Pharmaceutical is in the top three leading positions in the industry in terms of revenue scale and profit scale, and the performance growth rate is also very impressive. In addition, the company's ROE and dividend levels are among the highest in the industry.

According to long-term data, since its listing in 2013, the company's cumulative dividends have exceeded HK$1.9 billion (including special dividends), and the average annual dividend ratio has exceeded 30%. Behind stable dividends, its excellent performance deserves investors' attention.

The “1+6” multi-specialty layout stabilizes the basic market

The Kangchen Pharmaceutical Division has always been a pillar of the company's steady development. In 2023, the Conson Pharmaceutical Division also continued to play an important role in stabilizing the company's performance. Coupled with a mature academic promotion model and the acceleration of in-depth innovation and R&D, the growth space of the Kangchen Pharmaceutical Division continues to expand rapidly.

Financial reports show that in 2023, the company's nephrology division received sales revenue of about 1.74 billion yuan, an increase of about 11.0% over the previous year. Thanks to a mature academic promotion system, its leading product, uretoxin granules, bucked the trend and maintained steady growth in the context of collection in the six provinces and cities of Guangdong and Beijing. It received 1.65 billion yuan in sales revenue, an increase of 10.2% over the previous year, and ranked first in the modern pharmaceutical category for oral administration of nephropathy.

With exclusive varieties, more than 30 years of market verification, evidence-based medicine and systems biology research, and accurate curative effects and many qualifications, although individual inter-provincial alliances have had an impact on sales of uremic clear granules, their sales in collection areas have achieved positive growth, proving its management capabilities and also reflecting Kangchen Pharmaceutical's market sales moat in this field.

Furthermore, in the “Guidelines for Clinical Application of Proprietary Chinese Medicines for Chronic Kidney Disease Phase 3-5 (Non-dialysis)”, uremia granules also have the only “strong recommendation” status, further strengthening the company's academic foundation for clinical promotion in this field as an original research pharmaceutical company.

As another exclusive proprietary Chinese medicine for nephrology, Renal Enhancing Humidification Granules also showed excellent results during the reporting period. Its current sales revenue increased 25.5% year over year. In 2023, beneficial kidney humidification granules were recommended by the “Guidelines for the Integrated Diagnosis and Treatment of Diabetic Kidney Disease” and the “Guidelines for the Combined Diagnosis and Treatment of IgA Nephropathy”.

As product sales continue to expand in the future, Renal Enhancing Humidification Granules are expected to become another major variety after uretoxin granules. Together, the two utilize the advantages of traditional Chinese medicine in treating chronic kidney disease and provide a Chinese solution for the global prevention and treatment of kidney disease. Furthermore, in terms of the causes of CKD, the company lays out DKD, HTN, and FSGS drugs, as well as stocks of drugs to treat related complications during dialysis, such as roxastat (treatment of renal anemia, production approval has been declared), lanthanum carbonate (treatment of hyperphosphatemia), and innovative drugs to treat uremic pruritus, highlighting the company's deep commitment to nephrology and consolidating its strategic position as a leader in the Chinese nephrology market.

In the field of imaging product lines, the company's current sales revenue of medical imaging contrast agents is about 156 million yuan.

Judging from specific measures to maintain stable performance of the imaging product line, in response to the gradual inclusion of contrast products in national collection, the company further accelerated the progress of the consistency evaluation of gadolinium and iodine agents. In December of last year, the consistency evaluation of iopamol injection was approved, and the consistency evaluation of gadolipentate glucamine injection is also awaiting approval results. Furthermore, many of the company's imaging products under development are progressing smoothly. In terms of CT contrast agents, it is expected that ioxanol injections and iopromide injections will be launched this year; in terms of MRI contrast agents, 2 new products are expected to be launched next year, bringing new impetus to the development of the company's imaging product line.

In addition to continuing to promote the in-depth development of nephrology and imaging product lines, the company is also rapidly expanding existing products for women and children, bone injuries, skin, liver and digestion.

Take the women's and children's product line as an example. In 2023, the company's sales revenue for women and children's medicines was about 294 million yuan, an increase of about 22.7% over the previous year. Among them, as the only oral liquid iron supplement that has entered the national basic drug and medical insurance catalogue, Yuanlikang has become a recommended medication for various guidelines such as the “Nutritional Anemia Clinical Path” due to its good taste, convenient dosage, high absorption rate, high safety, and catalogue entry advantages, consolidating Yuanlikang's competitive advantage on the IDA prevention and treatment circuit for children and pregnant women. In 2023, Yuanlikang entered the new medical insurance catalogue, lifted medical insurance reimbursement restrictions on iron deficiency anemia in children, and opened up adult reimbursement, which is expected to bring greater benefits to the company.

On the side of the Yulin Pharmaceutical Division, by strengthening clinical research, it creates a competitive advantage through curative effects; starts with product promotion and brand promotion, optimizes the communication matrix, maintains a high level of brand image exposure, and explores new models of brand co-building and promotion with well-known pharmacy chains; in terms of terminals, it strengthens standardized management and deepens the sales line. During the reporting period, the Yulin Pharmaceutical Division achieved sales revenue of about 395 million yuan, an increase of more than 10.2% over the previous year. It has achieved profit after strategic adjustments for three consecutive years.

Strengthen innovative research and development to further enhance core competitiveness

Guided by the R&D strategy of “equal emphasis on independent R&D and joint R&D”, the company's independent R&D and cooperative R&D achieved dual-track development in 2023, opening up a new situation of the company's innovation and transformation.

At the level of independent research and development, the company's pipeline is currently distributed in traditional Chinese medicine and chemical medicine, covering generic pharmaceuticals and innovative drugs, and prioritizing key sectors such as nephrology and imaging. The company currently has a total of 14 products under development, 7 of which are self-developed products.

In terms of cooperative research and development, the company is joining forces with leading pharmaceutical companies in the industry, such as Pharmaceuticals, Kangde Pharmaceutical and Beite Pharmaceutical to develop new nephrology drugs and contrast agents and guarantee APIs to create a new starting point for the company's sustainable development. At present, the company has jointly developed 7 products.

epilogue

It is easy to see that as a high-quality target whose commercialization capabilities have been proven by the market, Kangchen Pharmaceutical continues to release its intrinsic value with a rich and stable product line, stable performance growth, stable and healthy cash flow, and stable dividend payment policies. The performance of the stock price in the secondary market reflects the recognition of the company's investment value. Despite this, the company's current price-earnings ratio (TTM) is only 5.25, and the dividend ratio (TTM) is as high as 8.02%, so the valuation is still very attractive. Driven by new performance drivers such as Yishen Humidification Particles and Yuanlikang, the company's investment cost performance ratio is expected to continue to rise.