2021 revenue and net profit beat our expectations
　　China Traditional Chinese Medicine (CTCM) announced its 2021 results: Revenue rose 28.7% YoY to Rmb19.1bn and net profit attributable to shareholders rose 16.2% YoY to Rmb1.9bn (EPS of Rmb0.38). Results beat our expectations due to strong growth of its major business in 2021.
　　Trends to watch
　　Sales of traditional Chinese medicine (TCM) granules maintained growth,　but net profit margin declined. In 2021, the TCM granules business contributed revenue of Rmb13.2bn, up 32.2% YoY, accounting for 69.5% of CTCM’s revenue. In 2021, gross margin was 70.0% (down 0.5ppt YoY) and net profit margin was 16.2% (down 1.2ppt YoY), mainly due to the company's strong presence in the primary medical institution market and increased investment in the market. The company has optimized and restructured the equity and business structure of the two core subsidiaries. We believe this will further strengthen the competitiveness of the two subsidiaries.
　　Finished drug sales continued to rise. In 2021, this segment’s revenue　totaled Rmb3,489.3mn, up 13.8% YoY, accounting for 18.3% of CTCM’s revenue and gross margin was 61.0%, up 3.8ppt YoY, due to a significant increase in turnover from high-margin products. Net profit margin was 6.7%, down 0.5ppt in 2021.
　　Revenue from TCM decoction pieces rose 14.6% YoY to Rmb1,418.0mn in　2021. This segment’s gross margin was 17.3%, up 2.1ppt YoY and net profit margin was -5.0%, down 2.1ppt YoY in 2021. We believe that the company will build a complete national TCM decoction piece supply chain system in the future by increasing the investment in marketing and R&D expenses and actively coordinating its production capacity.
　　Financials and valuation
　　We maintain our 2022 EPS forecast at Rmb0.41 (YoY 6.3%) and 2023 EPS forecast at Rmb0.47 (YoY 14.8%). Stock is trading at 8.3x 2022e and 7.3x 2023e P/E. We maintain an OUTPERFORM rating. Considering the sector valuation has declined, we cut TP 18.6% to HK$5.86 (12.3x 2022 P/E and 10.8x 2023 P/E), offering 48.0% upside.
　　Risks
　　Lower-than-expected return on new business investment and revenue from TCM granule business