According to the financial statement for Q1, the revenues of the Company rose by 19.2% YOY to RMB 5 billion and the net profits rose by 38% to RMB 820 million. Even if the 25% tax rate of the same period of last year was adopted, the net-profit growth rate still reached 21.5%, maintaining the rapid growth trend. At the same time, the Company recorded the net increase of RMB 890 million in the operating cash flow, rising by 86% YOY, which was the highest level since the financial crisis, revealing the excellent quality of operation.

In the previous few years, Kangmei focused on the whole-industrial-chain strategy of Chinese traditional medicines and has operations in the upstream, middle-stream and downstream industry, thus gradually controlling the Chinese medicine resources and distribution market. In 2015, the Company's strategy of building the nationwide internet medicine became more evident. The internet medical platform has taken the initial form. In the future, the complete ecosphere of virtual hospitals is expected to be realized, placing the Company again in the leading position of the industry.

Recently, Qinghai Provincial Office of Financial Affairs approved Kangmei to invest RMB 100 million to build the Chinese Medicine Exchange. We believe that, after Chinese Medicine Exchange is established, the market space of e Medicine Valley will be opened. The future commission and financing service may bring more than RMB 1 billion gross margin for the Company.

Internet medicine improves valuation

The Company has advantages in whole-industrial-chain of Chinese medicine. It has gradually eliminated the bottleneck of decoction pieces. The multiple marketing provides the channel support and the future sustainable growth is expectable. In particular, since 2015 the Company has been working to accelerate internet+ tactics. The internet medical platform has taken the initial form. In the future, the complete ecosphere of virtual hospitals is expected to be realized, placing the Company again in the leading position of the industry. The building of the platform will greatly improve the market recognition and valuation. We grant it 45X 2015EPS, and the target price can be CNY62.44, with “Buy” rating. (Closing price at 12 June 2015)

Rapid growth of results in 1Q15

According to the financial statement for Q1, the revenues of the Company rose by 19.2% YOY to RMB 5 billion and the net profits rose by 38% to RMB 820 million. Even if the 25% tax rate of the same period of last year was adopted, the net-profit growth rate still reached 21.5%, maintaining the rapid growth trend. At the same time, the Company recorded the net increase of RMB 890 million in the operating cash flow, rising by 86% YOY, which was the highest level since the financial crisis, revealing the excellent quality of operation.

The result growth was mainly contributed by the income growth of traditional Chinese medicinal decoction pieces, which could rise by more than 40%. At present, the decoction pieces industry is in the booming stage. In next 3 years, the capacity of decoction pieces in the Company is expected to rise to more than 60,000 tons, which will support the continuous growth of decoction pieces business. Besides, the price of medicinal materials has rose stably, the exploitation of in-forest ginseng in the reserve has also gradually contributed to the revenues, which help the medicine trade business continue growing steadily. The direct-sales team now has more than 230,000 people. In 2015, probably 20 new direct-sales products will be launched into the market and high-speed growth is expected, we estimate the business's revenue can exceed RMB 1 billion. What's more, the rise of profitability also contributed to the result growth. In Q1, the integrated gross margins rose by 0.39 percentage points to 27.7%.

Internet medical strategy is pushed forward rapidly

In the previous few years, Kangmei focused on the whole-industrial-chain strategy of Chinese traditional medicines and has taken the leading position in the industry. In the upstream, the Company worked hard to build more than 50,000 Chinese mu of GAP and standard farm of pseudo-ginseng and Panax ginseng. At the same time, it has built 9 factories of traditional Chinese medicinal decoction pieces, thus basically finalizing the national layout. Besides, the Company has also built Kangmei (Bozhou) Huatuo International Chinese Medicine Town and put it into operation while managing the traditional Chinese medicine markets that account for more than 75% of the national trading volume in China. Meanwhile, it has integrated the hospitals and pharmacy resources by means of new-building, M&A or entrusting. Overall speaking, the Company has operations in the upstream, middle-stream and downstream industry along the traditional Chinese medicine industrial chain, thus gradually controlling the Chinese medicine resources and distribution market.

In 2015, the Company's strategy of building the nationwide internet medicine became more evident. Regarding data and platform, the Company, together with the former team of Microsoft, has established Kangmei Health Cloud Service Co., Ltd., which will develop the cloud computing system. It has also collaborated with xinhua.com to establish Kangmei Health Think Tank to build the big data platform of health, revealing the Company is actively working to establish the underlying data support for internet medical platform. Before that, the Company had announced the collaborative programs with Yulin of Guangxi, Qinghai Province and Guangzhou city, etc. It provides mobile medical construction service for public hospitals, and participates in hospital operations and management. At the same time, as the sole platform in Qinghai, it is responsible for providing online inquiry, appointment and registration, hospital guide and report query service, etc., thus offering online and offline service systems. In terms of medicine purchase, the Company is working together with professional e-commerce businesses to pilot test the Virtual Pharmacies in Guangzhou, Shenzhen and Beijing, etc. A few provincial-level Chinese medicine hospitals have had access to Kangmei Network Platform. These companies can read the e-prescriptions of these hospitals, prepare traditional Chinese medicines and distribute them to the homes of patients, thus establishing foundation for online sales of prescription medicines. In terms of upstream industry, the Company has signed agreement with Zhongheng Group and Youbo Pharmaceutical about supply chain of traditional Chinese medicines and channel collaboration, revealing the Company's channel building has been recognized by the market and its product lines will be richer. In general, the Company's internet medical platform has taken the initial form. In the future, the complete ecosphere of virtual hospitals is expected to be realized, placing the Company again in the leading position of the industry.

Internet finance will probably accelerate profits

Recently, Qinghai Provincial Office of Financial Affairs approved Kangmei to invest RMB 100 million to build the Chinese Medicine Exchange. We believe the Company has core advantages in this field. At first, Kangmei Pharmaceutical is the maker of Chinese medicine price index and delivery standards. In short term, no companies will receive the approval. Second, the Company controls major Chinese medicine markets in Bozhou, Puning, Yulin and Qinghai, thus having the delivery ability that is difficult to be duplicated.

The Company operates the e Medicine Valley, a large trading platform. Since 2015, the transactions have risen rapidly. At present the daily transaction value is about RMB 2 billion, with 10% of them are spot goods deliveries. We believe that, after Chinese Medicine Exchange is established, the market space of e Medicine Valley will be opened. At present, most of the investors in e Medicine Valley are financial investors. The nature of investment target of Chinese medicines is increasing. In the future, it is likely the Exchange will become a futures exchange. It is worth pointing out that, the future commission and financing service may bring more than RMB 1 billion gross margin for the Company.

Catalysts

The newly-added capacity of traditional Chinese medicinal decoction pieces is released rapidly;

The expansion of direct-sales channels is faster than expected;

The agreements of internet medical platforms are signed and implemented.

Risks

The internet medical health service platform promotion will probably stay lower than expectations:

Insufficient talent reserve will influence on the business layout.

Financials

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