Charlie Munger said, “The goal I set for myself was to pursue common sense that ordinary people don't have.” Only investors who are good at discovering some unique rules in the market won't swim naked after the tide has receded. And the “rules” we are looking for can often be found in financial data to support it.

In 2023, Sihuan Pharmaceutical (00460) achieved operating revenue of 1,861 billion yuan (unit: RMB, same below), and operating profit of about 162 million yuan, returning to profit trajectory. It is worth noting that the company's medical and aesthetic business performance was impressive, achieving revenue of 450 million yuan during the period, an increase of 200.3% over the previous year. At the same time, total R&D expenditure reached 578 million yuan, which began to decline year by year, and performance entered an inflection point.

Zhitong Finance App believes that the strong explosion of performance in the medical and aesthetic sector indicates that Sihuan Pharmaceutical has entered a new cycle of high-quality development with medical aesthetic+biomedicine two-wheel drive. The value of the one-stop medical and aesthetic platform was gradually unleashed, and R&D realized profit flexibility. High alpha attributes were evident, and Sihuan Pharmaceutical 2.0 version set sail at an accelerated pace.

Follow the trend: 3.0 marketing is on the rise, medical and aesthetic platformization is fully advanced

With the advantage of relying on non-surgical medical methods to meet the many needs of beauty seekers, light medical beauty, which mainly focuses on injecting beauty, optoelectronic equipment for anti-aging beauty, and water light acupuncture, has become a hot topic in the Chinese medical and aesthetic industry.

According to ISAPS (The International Society of Aesthetic Plastic Surgery, International Society of Aesthetic Plastic Surgery) data, in 2022, global plastic surgery accounted for 44.3%, and non-surgical procedures accounted for 55.7%. Among them, non-surgery is basically equal to light medical aesthetics. According to domestic reports, in 2022, China's medical and aesthetic surgery revenue accounted for 48%, and non-surgical revenue accounted for 52%. As can be seen from data from international societies, domestic reports, and medical and aesthetic institutions, light medicine and aesthetics have become dominant in the medical and aesthetic market, and there is also great potential for development.

In line with the general development trend of the medical and aesthetic industry, Sihuan Pharmaceutical has carefully incubated a “one-stop” new medical and aesthetic platform - Beauty Space, and is driven by a “self-development+BD” dual engine to create a complete product matrix across the medical and aesthetic value chain. Currently, Huan Yan Space has more than 40 self-developed and exclusive agent products, including more than 10 self-developed products in the three categories of devices and more than 20 self-developed products in the second category.

According to the Zhitong Finance App, the development path of the Sihuan Pharmaceutical and Aesthetic sector is clear: first, develop the market with botulinum toxin, and secondly, fully advance to medical and aesthetic platformization with the 3.0 marketing version+ full product matrix, and eventually form a new accelerator of corporate value. Looking at it now, the company's growth logic in this sector is gradually being implemented.

First, the continued release of large single products has led to a significant increase in performance. In 2023, sales of the company's key product, botulinum toxin, are expected to increase performance by more than 50%.

Second, 3.0 marketing is on the cutting edge, and the scale and operation are showing results. The business upgrade of Sihuan Pharmaceutical's 3.0 marketing version is mainly through optimizing the “direct management+agency” marketing strategy and strengthening accurate coverage and refined services for medical and aesthetic institutions through multi-dimensional and multi-event national and regional marketing and medical activities. On the production side, Sihuan Pharmaceutical products cover basic categories of light medicine and beauty, and two production bases and 7 production lines have been completed to ensure rapid industrialization after approval of some products. On the sales side, the company's sales channels have covered more than 350 cities and more than 4,700 medical and aesthetic institutions across the country, and the coverage rate for the top 500 medical and aesthetic institutions has reached 100%. Thanks to business upgrading and development, the company's medical and aesthetic division's revenue was about 92 million yuan, up 2450% year on year; the medical and aesthetic division's revenue ratio reached 24.2% of total revenue, a sharp increase of 17.3 percentage points over the previous year, and initially achieved the strategic goal of Sihuan Pharmaceutical's transformation and development into medicine and aesthetics.

Finally, the product matrix is in full bloom, and the platform's potential is improving. In addition to advanced marketing, Sihuan Pharmaceutical's product matrix is also constantly being enriched. Currently, Huan Yan Space exclusively represents high-quality overseas medical and aesthetic products, such as Swiss Water Light Acupuncture, which is in the clinical process; the exclusive agent, Vio Korea's dual-wave radiofrequency microneedling system was just approved for sale on March 19. In addition, Jingyan Biotech, a joint venture between the company and Beijing Lanjing Microbiology, a domestic synthetic biology unicorn company, also developed several next-generation light medical and aesthetic products based on PHA microspheres and other regenerative medical biomaterials during the year, which will also enter the clinical phase this year. With abundant product reserves, the Sihuan Pharmaceutical and Aesthetic sector is expected to continue to increase its boom track, and performance growth is expected to continue.

Looking back at the development history of international giant Aierjian, we can see that Sihuan Pharmaceutical's medical and aesthetic growth path is the same path. Strategic expansion and matrix have been created as the core competitive point of the enterprise. In the future, with rich product layout and diversified marketing channel capabilities, the platform's potential will be strengthened, which is expected to consolidate the company's long-term development momentum.

Building momentum: the two wings of pharmaceuticals fly hand in hand, steady transformation, and continuous interpretation of the dual growth logic

The two sides of Sihuan Pharmaceutical's pharmaceutical sector are steadily transforming. Among them, generic drug cash has not changed, and progress in innovative drugs is driving future growth.

During the year, a total of 13 generic drugs were approved for marketing, and 8 products were included in the national medical insurance catalogue, etc. These products will all bring new increases to the Group's pharmaceutical business revenue, and the cash base will not change. Furthermore, in 2023, Sihuan Pharmaceutical's slimming and fitness program will focus on the growth potential of innovative drugs. Driven by R&D, we accelerate the upgrading and development of the company's pharmaceutical business to innovative drugs.

Specifically, Xuanzhu Biotech's amneprazole sodium enteric tablets, as the first innovative proton pump inhibitor class 1 drug independently developed in China and with independent intellectual property rights, were approved for marketing by the State Drug Administration in June 2023. In the same year, they were successfully included in the national health insurance catalogue. In addition, Xuanzhu Biotech has advanced 3 of the world's leading innovative drugs to the clinical stage and is actively exploring “overseas strategies” for products.

Huisheng Biotech has also made many positive developments in product development and new drug marketing applications. During the year, Huisheng Biotech successfully approved marketing applications for a total of 7 drugs, including Mendong, Mendong 30, and Mentong 50 insulin injections. In addition, a total of 5 drugs, including Tokugu Mendong double insulin injections, were successfully approved for marketing. At the beginning of 2024, proline gagliflozin tablets, a Class 1 innovative drug developed by Huisheng Biotech to treat type 2 diabetes, were also successfully approved for marketing. Huisheng Biotech has simultaneously laid out indications for sugar reduction and weight loss in the world's most popular diet drug GLP-1 receptor agonist product. Currently, patients have been enrolled in phase III clinical phase III of the hypoglycemic indications of Huisheng Biotech's simeglutide. The weight loss indications are currently in the preclinical research stage. It is expected that IND will be reported in the second half of this year, and progress is ideal.

Relying on the cash and revenue generated by the generic drug business, Sihuan Pharmaceutical has built a pipeline of more than 60 innovative biopharmaceutical products, and has also built strong three core capabilities for registration, production and sales. As the pharmaceutical sector structure continues to be optimized and R&D results are transformed and implemented at an accelerated pace, the company is expected to open up new growth space.

The Zhitong Finance App believes that Sihuan Pharmaceutical's dual growth logic continues to be interpreted, and the certainty of performance growth has increased. First, the pharmaceutical sector is the primary growth logic. Generic drugs are the cornerstone of value, continuously generate cash flow, provide financial support for innovative drug research and development, promote Sihuan Pharmaceutical's transformation to a leading bioinnovative drug R&D platform, and help healthy long-term business development. Second, the dual engine acceleration of the medical, aesthetic and pharmaceutical business forms the company's second-tier growth logic. The collaboration between the two businesses will contribute a steady and continuous revenue stream to it, and the profit structure will gradually improve and increase.

Taking advantage of the momentum: strong beta+high alpha attributes show accelerated rise, the configuration is right

Sihuan Pharmaceutical has strong beta+high alpha resonance, and the configuration value is remarkable.

Looking at the industry beta, Sihuan Pharmaceutical will enjoy the growth dividends of the medical aesthetic+pharmaceutical industry. Light medicine and aesthetics are developing rapidly. By 2022, light medicine and aesthetics will contribute more than half of the overall medical and aesthetic market. It has already surpassed the heavy medical and aesthetic market, and has become the mainstream beauty method in medicine and aesthetics. Among them, the photoelectric category and injection category are the main components of the project, and it is expected that the next 5 years will still show a high growth rate of 20%-30%. With the release of the value of medical and aesthetic platformization, Sihuan Pharmaceutical will continue to seize the large-scale dividends of the light medical and aesthetic market.

Looking at the pharmaceutical sector, rich pipelines are abundant and sparse, the breast cancer and diabetes markets have broad prospects, and the company's growth prospects are quite clear. For example, as a biomedical company covering all diabetes products, Huisheng Biotech's scarce value is prominent. The future diabetes market is broad, and its growth momentum is strong. According to data disclosed by the International Diabetes Federation, in 2021, the number of adult diabetics in China reached 140 million, ranking first in the world. It is expected to rise to 160 million in 2030 and 170 million in 2045.

As far as Alpha itself is concerned, the medical and aesthetic business has achieved strong performance, and its platformization capabilities have been gradually confirmed; the pharmaceutical business is being replicated and the basic market is stable. As the pressure factors gradually disappear and innovative achievements are implemented at an accelerated pace, Sihuan Pharmaceutical will enter a new round of innovation and growth.

Furthermore, Sihuan Pharmaceutical has always maintained a sound financial position. By the end of 2023, the company's cash and cash equivalents plus wealth management products, secured deposits and time deposits totaled about $4.610 billion. The company's operating cash flow has also maintained a net cash inflow of 200 million yuan. In addition, the net book value of the company's property, plant and equipment was approximately RMB 2,175 billion, and total assets were approximately RMB 11.535 billion.

Focusing on the capital market, Sihuan Pharmaceutical was significantly undervalued. As of the close of trading on April 8, the company's total market value was only HK$4.852 billion, far lower than the company's current assets ($6.204 billion), which is basically equivalent to the total amount of cash and cash equivalents and wealth management products ($4.610 billion). The valuation safety cushion is sufficient, and subsequent profit inflection points are expected to drive up valuation. I believe that the next few years will be a stage of accelerated “artificial” growth of Sihuan Pharmaceutical. Following the trend, building momentum, and taking advantage of the trend, it is bound to usher in sustainable growth.