1Q22 results largely in line with our forecast

Xinbang Pharmaceutical announced its 1Q22 results: Revenue rose 8.10% YoY to Rmb1.58bn and recurring net profit attributable to shareholders increased 6.02% YoY to Rmb73mn. The firm’s results are in line with our forecast.

Trends to watch

1Q22 results largely in line with our forecast; business advantages increasingly pronounced. In 1Q22, Xinbang Pharmaceutical booked revenue of Rmb1.58bn, maintaining growth despite the COVID-19 resurgence. Its attributable net profit rose 1.80% YoY to Rmb73.48mn in 1Q22, and the recurring attributable net profit increased 6.02% YoY to Rmb72.68mn. Xinbang Pharmaceutical’s main business is centered on healthcare services, supplemented by medicine distribution and the manufacturing of traditional Chinese medicine. We think the business structure will continue to boost steady earnings growth for the company. We believe that its core business will gradually recover as the COVID-19 eases. In addition, the firm is actively pushing forward the centralized procurement of pharmaceuticals and consumables, which we think should enhance its pricing power amid economies of scale. We also expect this to contribute additional profit for the company and drive up its earnings.

Continues to develop specialized medical departments for core hospitals; pharmaceutical manufacturing business grows steadily.

Health care: Xinbang Pharmaceutical promotes joint development and integrated management at its hospitals, planning to build local flagship hospitals and preponderant departments. The chest pain medical center of the Affiliated Baiyun Hospital of Guizhou Medical University (hereinafter referred to as Baiyun Hospital) was certified as a standard chest pain center in 2021 and was licensed as a grass-roots atrial fibrillation medical center in April 2022. In March, Baiyun Hospital held a kick-off meeting for the congestive heart failure medical center project. We think the development of new specialized medical departments will enhance Xinbang Pharmaceutical’s competitiveness. We believe the firm will stick to the group-based management mechanism in 2022 and boost the coordinated development of healthcare service, education, and research. We expect the firm to leverage its advantages in healthcare service platforms and strengthen its workforce and internal control systems.

Pharmaceutical manufacturing: The firm completed all the R&D tasks of the Guanjie Kebi Pill project in 2021. This project also started production last year. We expect the firm to continue exploring new markets in 2022. At the same time, it is also developing high-end sealwort products and promoting the smart manufacturing of Chinese herbal decoction pieces. We believe the firm will build an industrial platform centered on Chinese herbal decoction pieces and supplemented by the trading of healthcare products and traditional Chinese medicinal materials via increased marketing of key product categories, thus achieving steady growth.

Operating indicators remain solid. In 1Q22, the firm’s gross margin fell 1.7ppt YoY to 19.4%; selling expense ratio dropped 0.4ppt YoY to 5.8%; G&A expense ratio remained flat YoY at 6.7%; and recurring net margin fell 0.3ppt YoY to 4.7%. We think the profit margin of its core business will remain stable in the near term and gradually rise in the long term.

Financials and valuation

We maintain our EPS forecasts of Rmb0.17 for 2022 and Rmb0.21 for 2023. The stock is trading at 26.9x 2022e and 22.1x 2023e P/E. We maintain an OUTPERFORM rating and our target price of Rmb7.37, implying 42.3x 2022e and 34.8x 2023e P/E, offering 57.5% upside.

Risks

Unfavorable changes in healthcare service policies; disappointing ramp-up of hospitals and improvement of management; medical accidents.