2021 results in line with our forecast

Xinbang Pharmaceutical announced its 2021 results: Revenue rose 10.7% YoY to Rmb6.47bn and net profit attributable to shareholders increased 57.3% YoY to Rmb273mn, implying EPS of Rmb0.13. The firm's results are in line with our forecast.

Trends to watch

Results show steady growth; revenue structure improving.

Healthcare: Revenue rose 5.24% YoY to Rmb2.07bn and gross margin (GM) remained flat YoY at 5.39% in 2021. Specifically, revenue from core hospitals grew steadily, with Rmb1.08bn from cancer hospitals and Rmb577mn from the Affiliated Baiyun Hospital of Guizhou Medical University.

Pharmaceutical distribution: Revenue rose 10.44% YoY to Rmb5.36bn, with that from drugs growing 10.08% YoY and that from medical devices growing 12.22% YoY. GM remained flat YoY at 12.83%.

Pharmaceutical manufacturing: Revenue grew 8.64% YoY to Rmb704mn, mainly thanks to the recovery in traditional Chinese medicines (TCM) sales and the sharp increase in the sales of Chinese herbal decoction pieces. Specifically, revenue from TCM rose 17.66% YoY to Rmb398mn. Guizhou Tongde Pharmaceutical (a subsidiary) recorded solid YoY growth of 44.69% in its revenue to Rmb268mn. The GM fell 1.55ppt YoY to 20.64%.

Number of patients at core hospitals increasing; accelerating the development of healthcare service, education, and R&D. Healthcare: In 2021, the number of patients at the firm's hospitals reached 1.16mn, with 90,000 patients receiving radiotherapy and 33,800 patients undergoing surgical operations. The firm promotes joint development and integrated management at its hospitals. In 2021, it added three chief experts and ensured development of core hospitals through unified management of doctors. The Baiyun clinical teaching center of Guizhou Medical University became operational in September 2021, giving a boost to core hospitals in strengthening their healthcare services, education and R&D. In addition, the company developed specialized medical departments for its core hospitals. The comprehensive department of cancer hospitals specializes in treating emergency and severe diseases, and the Affiliated Wudang Hospital of Guizhou Medical University is characterized by a combination of traditional Chinese and western drugs.

Pharmaceutical distribution: Customers increased thanks to China's two-invoice medical insurance system and centralized procurement. In 2021, the business covered over 95% of hospitals above the provincial level. At the same time, the company further expanded its logistics network. It added 31 new warehouse proprietors in 2021, and it is servicing 64 proprietors selling medicines and medical equipment.

Operating indicators remain solid; expects further growth in 2022. Xinbang Pharmaceutical's GM dropped 0.5ppt YoY to 20.9% in 2021, mainly dragged by rising purchasing costs of TCM materials. Its selling and G&A expense ratios slid by 1.3ppt and 0.2ppt YoY to 5.6% and 6.3%, reflecting improved operating efficiency. In 2021, the firm's attributable net margin rose 1.2ppt YoY to 4.2%. We believe the profit margin of its core businesses will increase steadily, thanks to its group-based management mechanism, improved quality and enhanced efficiency.

Financials and valuation

We maintain our EPS forecast of Rmb0.17 for 2022 and Rmb0.21 for 2023. The stock is trading at 30.9x 2022e and 25.4x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb7.37. Our TP implies 42.3x 2022e and 34.8x 2023e P/E, offering 37.0% upside.

Risks

Unfavorable changes in healthcare service policies; disappointing earnings growth at existing hospitals; medical accidents.