Turning point
An established Chinese medicine maker with a rich history spanning 122 years. Founded in 1902, Yunnan Baiyao is known for its pharmaceutical and toothpaste lines. With its core products being mostly consumer goods, they are less impacted by policy changes, resulting in steady growth in both revenue and profit. The company is now venturing into aesthetic medicine & skincare, capitalizing on its profound TCM roots and strong R&D capabilities.
Expect at least 50% decrease in non-operating losses in 2023 to enhance its earning quality and re-rate the stock. Non-operating losses from investments has introduced uncertainty into our earnings estimates. However, with the substantial reduction in its investment exposure (from RMB 13.8bn in 2020 to RMB 1.7bn in 1H2023), we expect the loss to narrow to Rmb1bn or below in 2023, vs Rmb2bn loss in 2022, with further room to be reduced moving forward. This would alleviate earnings uncertainty and hence should help to lift the stock’s valuation.
Favourable industry policies to drive share price. China has consistently supported the Chinese medicine industry, introducing favourable policies every year. This trend is expected to continue in 2024, likely resulting in a positive impact on the sector’s share prices. As the second largest player in terms of market cap, the company stands to gain significantly from these developments. Trading at a trough valuation of 18x FY24 PE, Yunnan Baiyao is more attractively valued vs its peers (average at 36x), and presenting an attractive entry point for investors.