Company Report expect consolidated top-line to grow at 84%/16%/14% in FY16E/17E/18E, and the strong...

Friday, October 07, 2016

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule

15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1

China Traditional Chinese Medicine (570 HK) TCM destocking continues; CCMG growth resilient

■ Destocking for the TCM finished drugs will continue in 2H16, but

segment is likely to revitalize thereafter in FY17E, in our view

■ Granule business (CCMG) to act as major growth driver

■ We maintained BUY rating while lifted TP to HK$5.3 amid TCM

business turnaround and resilient CCMG business in FY17E/18E

We expect TCM business to revitalize in FY17E Management guided the inventory destocking for TCM finished drugs will continue

until the end of 2016. We believe the top-line trajectory for TCM business to recover

in FY17E, and expect its standalone revenue growth to bounce back to c.9% in

FY17E (vs. c.18% decline in FY16E amid destocking), which is on par with the TCM

industry growth rate. This is supported by: 1) low base in FY16E; and 2) centralized

sales platform likely to add another leg to its growth after the headwinds from the

destocking.

Granule business to be the major growth driver down the road We believe there be will another 1-2 years before the government fully opens up

the granules market, as there are still several unsolved issues such as

reimbursement settlement and formation of regulation standards. As the sub-sector

leader, Tianjiang achieved north of 20% 1H16 top and bottom line, beating our

expectation. We expect the fast growth momentum to persist in FY17E/18E, and

thus we slightly lifted Tianjiang’s earnings forecast by +3%/+2% (to 20%/17%) for

FY17E/18E, which is in-line with market consensus.

We slightly tuned-up consolidated FY16E/17E/18E estimates We revised up our consolidated financial forecasts as we believe the TCM business

will bottom out while CCMG business continues to be resilient. We expect

consolidated top-line to grow at 84%/16%/14% in FY16E/17E/18E, and the strong

FY16E growth will be mainly driven by the full consolidation from Tianjiang. We

estimate diluted EPS to grow at 43%/16%/16% during the period as a result of

earnings growth and the share base dilution arising from the equity financing for

acquisition. Moreover, the company declared an interim dividend per share of

HK$6.44 cents for the first time since 2012 and maintained not less than 30%

payout ratio in the subsequent years.

Lifted DCF-based TP to HK$5.3 (16x FY17E P/E and 1.0x PEG) We maintained BUY rating and lifted our 12m TP to HK$5.3 from previous HK$4.0.

Share price has been corrected notably to -2SD early this year, we believe the

company deserves a revaluation after the headwinds from the destocking, as the

company is currently trading at 12.7x FY17E P/E, a significant discount vs. industry

average of 17.6x. Risks: 1) further price erosions; 2) higher SG&A expenses; and

3) competition.

Financials

RMB mn 2014A 2015A 2016E 2017E 2018E

Revenue 2,650 3,709 6,825 7,907 9,043

Growth (%) 90.0% 40.0% 84.0% 15.8% 14.4%

Net profit 413 622 1,077 1,246 1,452

Growth (%) 108.1% 50.5% 73.3% 15.6% 16.5%

EPS (RMB) 0.16 0.17 0.24 0.28 0.32

DPS (RMB) 0.00 0.00 0.07 0.08 0.10

P/E (x) 21.6 20.9 14.6 12.7 10.9

P/B (x) 2.7 1.3 1.3 1.2 1.1

ROE (%) 12.7% 5.3% 8.5% 9.2% 10.0%

Sources: Company data, CMS (HK) estimates

Milo Liu

(852) 3189 6711

Hayden Zhang

(852) 3189 6354

[email protected] [email protected]

WHAT’S NEW

EPS & TP upgraded

BUY

Previous

BUY

Price HK$4.15

12-month Target Price (Potential up/downside)

HK$5.3 (+28%)

Previous HK$4.0

Price Performance

Source: Bigdata

% 1m 6m 12m

570 HK 3.6 10.3 (33.9) HSI 0.6 17.9 8.8

Pharmaceutical & Healthcare

Hang Seng Index 23,953

HSCEI 9,947

Key Data

52-week range (HK$) 2.89-6.24

Market cap (HK$ mn) 18,391

Avg. daily volume (mn) 9.78

BVPS (RMB) as of 2016E 2.81

Shareholding Structure Sinopharm Group 36.4%

Bin Yang 8.5%

Xiaochun Wang 8.5%

Free float 46.6%

Related Research

China Traditional Chinese Medicine (570 HK) – Weak TCM segment continues to weigh on future earnings, June 24, 2016 Healthcare Sector Strategy and FY15E Preview – Sector re-rating after the tendering in 2H16, March 11, 2016 China Traditional Chinese Medicine (570 HK) – Business update and revisiting our forecasts, January 15, 2016 China Traditional Chinese Medicine (570 HK) – Best of both worlds, September 22, 2015

-60

-40

-20

0

20

Oct/15 Jan/16 May/16 Sep/16

(%)570 HSI Index


To access our research reports on the Bloomberg terminal, type CMHK

<GO>

2

Focus charts Figure 1: TCM market size (RMB bn) Figure 2: CCMG market size (RMB bn)

Source: Frost & Sullivan report, CMS (HK) Source: Frost & Sullivan report, CMS (HK)

Figure 3: Margins forecasts (%) Figure 4: CAPEX forecasts (RMB mn)

Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates

Note: The increase in CAPEX in FY15 was driven by the recent establishment of a TCM healthcare complex in Foshan and Chongqing; a new orthopedics TCM production base in Guizhou.

Figure 5: Efficiency forecasts (days) Figure 6: Cash position forecasts (RMB mn)

Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates

2011A-2015A CAGR: 16.8%

2016E-2020E CAGR: 8.2%

0

100

200

300

400

500

600

700

2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

2011A-2015A CAGR: 35.7%

2016E-2020E CAGR: 40.1%

0

10

20

30

40

50

60

2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

59.2%62.0%

59.1%57.0% 57.3% 57.4%

17.8%19.6% 18.8% 18.5% 18.8% 18.9%

14.2% 15.6% 16.8% 15.8% 15.8% 16.1%

0%

10%

20%

30%

40%

50%

60%

70%

2013 2014 2015 2016E 2017E 2018E

Gross Margin Operating Margin Net Profit Margin

6895

226

409

474

543

4.8%

3.6%

6.1%6.0% 6.0% 6.0%

0%

1%

2%

3%

4%

5%

6%

7%

0

100

200

300

400

500

600

2013 2014 2015 2016E 2017E 2018E

CAPEX CAPEX as % of sales

201 155 228 258 312 313

(152) (203) (250)(348)

(541) (546)

182 182

199 226

278 279

231

101

177 135

49 47

(700)

(500)

(300)

(100)

100

300

500

700

2013 2014 2015 2016E 2017E 2018E

AR days AP days Inv days Cash conversion cycle

345 439

2,102

1,487

1,922

2,466

-

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016E 2017E 2018E


To access our research reports on the Bloomberg terminal, type CMHK <GO> 3

Financial Analysis

Financial Model (CTCM+Tianjiang)

Figure 7: Income Statement (Consolidated, RMB’000) RMB '000 2013A 2014A 2015A 1H16A 2H16E 2016E 2017E 2018E

Total revenue 1,394,613 2,650,454 3,709,406 3,199,290 3,625,555 6,824,845 7,906,548 9,042,694

Cost of sales (568,834) (1,007,065) (1,515,453) (1,365,601) (1,569,083) (2,934,684) (3,376,096) (3,852,187)

Gross profit 825,779 1,643,389 2,193,953 1,833,689 2,056,473 3,890,162 4,530,452 5,190,506

SG&A expenses (576,937) (1,057,251) (1,382,787) (1,064,233) (1,515,559) (2,579,792) (2,988,675) (3,418,138)

Selling costs (404,629) (903,418) (1,195,636) (876,909) (1,238,793) (2,115,702) (2,451,030) (2,803,235)

General and admin expenses (ex. R&D) (126,361) (153,833) (187,151) (187,324) (276,765) (464,089) (537,645) (614,903)

Research and development expenses (45,947) (67,727) (112,324) (100,031) 52,257 (47,774) (55,346) (63,299)

Operating income 248,842 518,411 698,842 669,425 593,171 1,262,596 1,486,431 1,709,069

Other income (net) 16,167 31,905 44,410 16,940 24,444 41,384 47,943 54,832

Finance costs (27,434) (61,197) 26,118 (21,020) 5,635 (15,385) (47,471) (35,170)

EBITDA 333,290 669,414 911,655 772,314 776,205 1,548,519 1,805,347 2,062,640

Profit before taxes 237,575 489,119 769,370 665,345 623,250 1,288,595 1,486,903 1,728,731

Income tax (38,218) (70,386) (118,328) (120,269) (73,020) (193,289) (223,035) (259,310)

Tax rate 16% 14% 15% 18% 12% 15% 15% 15%

Minority interest (894) 1,544 (17,906) (54,300) 36,394 (17,906) (17,906) (17,906)

Net income 198,463 413,090 621,692 490,776 586,624 1,077,400 1,245,962 1,451,515

Total dividend declared (285,389) (37,831) (323,220) (373,789) (435,455)

Retained earnings 205,387 548,793 754,180 872,173 1,016,061

Basic EPS (RMB) 0.0968 0.1630 0.245 0.110 0.130 0.240 0.278 0.324

Diluted net income 198,463 413,090 621,692 490,776 586,624 1,077,400 1,245,962 1,451,515

Diluted EPS (RMB) 0.0968 0.1630 0.169 0.110 0.130 0.240 0.278 0.324

DPS (RMB) 0.064 0.008 0.072 0.083 0.097

Diluted weighted average shares ('000) 2,050,558 2,533,899 3,686,873 4,469,365 4,483,748 4,483,748 4,483,748 4,483,748

Margins 2013A 2014A 2015A 1H16A 2H16E 2016E 2017E 2018E

Gross margin 59.2% 62.0% 59.1% 57.3% 56.7% 57.0% 57.3% 57.4%

SG&A 41.4% 39.9% 37.3% 33.3% 41.8% 37.8% 37.8% 37.8%

R&D 3.3% 2.6% 3.0% 3.1% -1.4% 0.7% 0.7% 0.7%

Operating margin 17.8% 19.6% 18.8% 20.9% 16.4% 18.5% 18.8% 18.9%

Other income 1.2% 1.3% 0.9% 0.5% 1.3% 0.9% 0.9% 0.9%

Other income/(expenses) 0.0% -0.1% 0.3% 0.0% -0.6% 0.3% 0.3% 0.3%

Profit before tax margin 17.0% 18.5% 20.7% 20.8% 17.2% 18.9% 18.8% 19.1%

Net margin 14.2% 15.6% 16.8% 15.3% 16.2% 15.8% 15.8% 16.1%

YOY% 2013A 2014A 2015A 1H16A 2H16E 2016E 2017E 2018E

Total revenue 35% 90% 40% 125% 59% 84% 16% 14%

Gross profit 46% 99% 34% 114% 54% 77% 16% 15%

Selling costs 72% 123% 32% 97% 65% 77% 16% 14%

General and admin expenses (ex. R&D) 52% 22% 22% 104% 190% 148% 16% 14%

Research and development expenses 32% 47% 66% 217% -165% -57% 16% 14%

Operating income 18% 108% 35% 132% 44% 81% 18% 15%

Profit before taxes 10% 106% 57% 128% 30% 67% 15% 16%

Net income 18% 108% 50% 109% 52% 73% 16% 16%

Diluted EPS 2% 68% 3% 41% 44% 43% 16% 16%

Diluted weighted average shares 15% 24% 46% 21% 0% 22% 0% 0%

Sources: Company, CMS (HK) estimates



Figure 8: Earnings revisions (RMB’000)


2015

RMB '000 Actual Before After Delta % change Before After Delta % change Before After Delta % change

Total Revenue 3,709,406 6,754,807 6,824,845 70,038 1% 7,677,268 7,906,548 229,280 3% 8,661,742 9,042,694 380,952 4%

Cost of sales (1,515,453) (2,972,115) (2,934,684) 37,432 -1% (3,377,998) (3,376,096) 1,902 0% (3,811,166) (3,852,187) (41,021) 1%

Gross profit 2,193,953 3,782,692 3,890,162 107,470 3% 4,299,270 4,530,452 231,182 5% 4,850,575 5,190,506 339,931 7%

SG&A expenses (1,382,787) (2,634,375) (2,579,792) 54,583 -2% (2,994,135) (2,988,675) 5,459 0% (3,378,079) (3,418,138) (40,059) 1%

Selling costs (1,195,636) (2,175,048) (2,115,702) 59,346 -3% (2,472,080) (2,451,030) 21,050 -1% (2,789,081) (2,803,235) (14,154) 1%

General and Admin expenses (187,151) (459,327) (464,089) (4,763) 1% (522,054) (537,645) (15,591) 3% (588,998) (614,903) (25,905) 4%

R&D Expenses (112,324) (47,284) (47,774) (490) 1% (53,741) (55,346) (1,605) 3% (60,632) (63,299) (2,667) 4%

Operating income/loss 698,842 1,101,034 1,262,596 161,563 15% 1,251,395 1,486,431 235,036 19% 1,411,864 1,709,069 297,205 21%

Other income (net) 44,410 40,959 41,384 425 1% 46,553 47,943 1,390 3% 52,522 54,832 2,310 4%

Finance costs 26,118 (3,486) (15,385) (11,899) 341% (10,683) (47,471) (36,788) 344% 28,492 (35,170) (63,663) -223%

Profit Before Taxes 769,370 1,138,507 1,288,595 150,088 13% 1,287,265 1,486,903 199,638 16% 1,492,878 1,728,731 235,853 16%

Income Tax (118,328) (170,776) (193,289) (22,513) 13% (193,090) (223,035) (29,946) 16% (223,932) (259,310) (35,378) 16%

Tax Rate 15% 15% 15% 0% 0% 15% 15% 0% 0% 15% 15% 0% 0%

Minority interest (17,906) (17,906) (17,906) 0 (17,906) (17,906) 0 (17,906) (17,906) 0

Net Income 621,692 949,825 1,077,400 127,575 13% 1,076,269 1,245,962 169,693 16% 1,251,041 1,451,515 200,475 16%

Net Income (Adjusted) 621,692 949,825 1,077,400 127,575 13% 1,076,269 1,245,962 169,693 16% 1,251,041 1,451,515 200,475 16%

Basic EPS (RMB) 0.2453 0.2118 0.2403 0.0285 13% 0.2400 0.2779 0.0378 16% 0.2790 0.3237 0.0447 16%

Diluted Net Income 621,692 949,825 1,077,400 127,575 13% 1,076,269 1,245,962 169,693 16% 1,251,041 1,451,515 200,475 16%

Diluted EPS (RMB) 0.169 0.212 0.240 0.028 0.134 0.240 0.278 0.038 0.158 0.279 0.324 0.045 0.160

Basic Weighted Average Shares 2,533,899 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0%

Diluted Weighted Average Shares 3,686,873 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0%

Margins 2015A 2016E b.p. 2017E b.p. 2018E b.p.

Gross margin 59.1% 56.0% 57.0% 100 56.0% 57.3% 130 56.0% 57.4% 140

SG&A 37.3% 39.0% 37.8% (120) 39.0% 37.8% (120) 39.0% 37.8% (120)

R&D 5.0% 6.8% 6.8% 0 6.8% 6.8% 0 6.8% 6.8% 0

Operating margin 18.8% 16.3% 18.5% 220 16.3% 18.8% 250 16.3% 18.9% 260

Other income 0.9% 0.9% 0.9% 0 0.9% 0.9% 0 0.9% 0.9% 0

Profit before tax margin 20.7% 16.9% 18.9% 203 16.8% 18.8% 204 17.2% 19.1% 188

Minority interest as % of PBT 2.3% 1.6% 1.4% (18) 1.4% 1.2% (19) 1.2% 1.0% (16)

Net margin 16.8% 14.1% 15.8% 172 14.0% 15.8% 174 14.4% 16.1% 161

YOY%

Total Revenue 40% 82% 84% 189 14% 16% 219 13% 14% 155

Gross profit 34% 72% 77% 490 14% 16% 280 13% 15% 175

Operating income/loss 57% 48% 67% 1,951 13% 15% 232 16% 16% 29

Net Income 50% 53% 73% 2,052 13% 16% 233 16% 16% 26

Diluted EPS 3% 26% 43% 1,687 13% 16% 233 16% 16% 26

2017E 2018E2016E



Valuation

DCF Analysis

Our DCF-based valuation suggests a 12-month target price of HK$5.3. The key assumptions are as follows:

1) We set risk free rate at 3.0%;

2) We assume equity risk premium at 12.0%, adjusted industry risk premium at 3% and beta of 1.0. This gives us

the company’s cost of equity at 16.0%;

3) Assuming CTCM borrows at 6% interest rate and its effective tax rate remains at 15.0%, we estimate the weighted

average cost of capital (WACC) to be 14.1%;

4) We set the terminal growth rate at 2%.

Figure 9: DCF analysis


We use our sensitivity analysis to determine the high end (HK$5.5, implying 16.8x FY17E P/E), the midpoint

(HK$5.3, corresponding 16.2x FY17E P/E) and the low end (HK$5.0, implying 15.2x FY17E P/E). Parameters

include WACC (13.6%/14.6%/15.6%) and terminal rate (1%/2%/3%).

Figure 10: Sensitivity analysis


COE WACC 13.6% 13.6% 13.6% 14.6% 14.6% 14.6% 15.6% 15.6% 15.6%

Risk Free rate 3.0% Perpetuity 1% 2% 3% 1% 2% 3% 1% 2% 3%

Beta 1.00 2016E-2025E $13,335,393 $13,335,393 $13,335,393 $13,156,357 $13,156,357 $13,156,357 $12,981,101 $12,981,101 $12,981,101

Equity Risk premium 10.0% 2026E-2030E $5,080,655 $5,080,655 $5,080,655 $4,914,566 $4,914,566 $4,914,566 $4,754,825 $4,754,825 $4,754,825

Adjusted industry risk premium 3% Terminal $2,139,948 $2,346,949 $2,592,894 $1,756,065 $1,913,860 $2,098,789 $1,450,121 $1,571,918 $1,713,001

COE 16.0% NAV $20,555,996 $20,762,997 $21,008,941 $19,826,988 $19,984,783 $20,169,712 $19,186,046 $19,307,844 $19,448,927

Share count ('000) 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748

WACC NAV/share $4.6 $4.6 $4.7 $4.4 $4.5 $4.5 $4.3 $4.3 $4.3

WACC = Re x E/V + Rd x (1-corporate tax rate) x D/V 1.18 HKD/RMB $5.4 $5.5 $5.5 $5.2 $5.3 $5.3 $5.0 $5.1 $5.1

Re 16.00%

E 11,837,761

D 2,450,359

V 14,288,120

Rd 6%

Tc 15%

WACC 14.1%

WACC 1.0% 2.0% 3.0%

13.6% $5.4 $5.5 $5.5

14.6% $5.2 $5.3 $5.3

15.6% $5.0 $5.1 $5.1

Terminal rate



P/E Analysis

Our DCF based target price of HK$5.3 corresponds to 16.2x FY17E P/E and 1.0x FY17E PEG. We compare it

with two sets of comparables: 1) A-share leading names, such as Jiangsu Kanion (600557 CH), which is currently

trading at 23.7x FY17E P/E; and 2) Hong Kong listed peers such as Livzon Pharma (1513 HK) and Tongrentang CM

(8138 HK), all trading at north of 18x FY17E P/E. We believe our target P/E at 16.2x is justified, given: 1) bellwether

in the TCM industry; 2) Tianjiang acquisition to tap into the fast growing CCMG market since 2015; and 3) SOE

platform allowing the company to leverage this resource in the long run. The stock is currently trading at 14.6x FY16E

P/E, -1 standard deviations below average for the past 3 years which we belive is still attractive.

Figure 11: Peers valuation comparison Name 中文名 Stock Code Mkt Cap –––––––P/E––––––– –––––––P/B––––––– –––––PEG–––––– Gross Margin (%)

(HK$ mn) 15A 16E 17E 15A 16E 17E 15A 16E 17E 15A 16E 17E

CTCM 中国中药 570 HK 18,391 20.9 14.6 12.7 1.3 1.3 1.2 0.74 0.56 0.47 59.1 57.0 57.3

A-share peers

CHINA RESOURCE-A 华润三九 000999 CH 28,943 21.3 19.1 16.9 3.5 2.8 2.5 2.4 2.1 1.9 60.6 62.2 62.1

TASLY PHARMAC-A 天士力 600535 CH 52,761 29.7 28.1 24.7 5.9 5.3 4.6 1.8 1.7 1.5 38.2 37.4 37.8

BEIJING TONGRE-A 同仁堂 600085 CH 48,473 69.2 41.6 37.1 8.6 5.3 4.9 5.6 3.4 3.0 45.5 45.5 45.7

GUANGZHOU BAIY-A 白云山 600332 CH 44,110 18.2 21.0 20.9 2.8 2.8 2.5 3.9 4.5 4.4 35.6 37.2 37.1

JIANGSU KANION-A 康缘药业 600557 CH 12,653 35.2 27.6 23.7 4.6 3.5 3.1 2.7 2.1 1.8 74.3 74.8 74.9

Simple average 34.7 27.5 24.7 5.1 3.9 3.5 3.3 2.8 2.5

Weighted average 36.3 28.5 25.7 5.4 4.2 3.8 3.4 2.9 2.7

Hong Kong peers

BAIYUNSHAN PH-H 白云山 874 HK 44,110 18.2 16.4 15.1 2.8 2.0 1.8 2.3 2.1 1.9 35.6 36.6 36.8

LIVZON PHARM-H 丽珠集团 1513 HK 24,551 35.5 22.1 18.4 5.1 2.9 2.6 2.8 1.8 1.5 60.6 61.8 62.2

TONG REN TANG-H 同仁堂科技 1666 HK 19,955 25.4 27.0 23.7 3.4 3.2 2.9 2.9 3.1 2.7 49.9 50.8 51.2

TONGRENTANGCM 同仁堂国药 8138 HK 9,576 23.5 21.8 19.2 4.6 4.4 3.7 1.8 1.7 1.5 70.2 73.4 73.3

CHINA SHINEWAY 神威药业 2877 HK 6,757 10.3 10.3 10.3 1.3 1.1 1.0 N/A N/A N/A 66.2 65.0 64.8

Simple average 22.6 19.5 17.3 3.4 2.7 2.4 2.5 2.2 1.9

Weighted average 23.6 19.8 17.6 3.7 3.0 2.6 2.4 2.0 1.8

Sources: Bloomberg, CMS (HK), as of 06 Oct 2016

Figure 12: Rolling 12m forward P/E band

Sources: Bloomberg, CMS (HK)

1

2

3

4

5

6

7

8

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

22X

Price (HKD)27X

18X

14X

9X



Figure 13: Peers valuation comparison

Sources: Bloomberg, CMS (HK), as of 06 Oct 2016

15A 16E 17E 15A 16E 17E

JIANGSU HENGRUI MEDICINE C-A 恒瑞医药 600276 CH RMB 103,419 44.1 37.2 29.8 9.6 8.3 6.6

SHANGHAI FOSUN PHARMACEUTI-A 复星医药 600196 CH RMB 53,568 22.0 18.7 16.4 3.0 2.6 2.3

TASLY PHARMACEUTICAL GROUP-A 天士力 600535 CH RMB 45,574 29.7 28.1 24.7 5.9 5.3 4.6

BEIJING TONGRENTANG CO-A 同仁堂 600085 CH RMB 41,871 69.2 41.6 37.1 8.6 5.3 4.9

AIER EYE HOSPITAL GROUP CO-A 爱尔眼科 300015 CH RMB 35,211 71.8 59.2 44.3 12.9 12.0 9.9

HUADONG MEDICINE CO LTD-A 华东医药 000963 CH RMB 33,392 32.4 23.6 19.0 12.0 5.0 4.5

LEPU MEDICAL TECHNOLOGY-A 乐普医疗 300003 CH RMB 32,273 60.2 38.6 29.9 6.5 5.9 5.0

HUNAN ER-KANG PHARMACEUTI -A 尔康制药 300267 CH RMB 28,494 50.9 30.9 22.7 8.3 5.7 4.7

JOINTOWN PHARMACEUTICAL-A 九州通 600998 CH RMB 35,378 46.3 42.0 33.7 3.8 3.7 3.4

HUALAN BIOLOGICAL ENGINEER-A 华兰生物 002007 CH RMB 34,953 43.4 44.8 34.4 7.0 7.5 6.3

SHENZHEN SALUBRIS PHARM-A 信立泰 002294 CH RMB 29,037 24.9 19.5 16.1 6.9 5.3 4.5

ZHEJIANG HUAHAI PHARMACEUT-A 华海药业 600521 CH RMB 26,726 45.3 47.5 36.5 5.6 6.4 5.7

CHINA RESOURCES SANJIU MED-A 华润三九 000999 CH RMB 25,001 21.3 19.1 16.9 3.5 2.8 2.5

SICHUAN KELUN PHARMACEUTIC-A 科伦药业 002422 CH RMB 23,400 41.3 33.2 28.5 2.4 2.0 1.9

HARBIN GLORIA PHARMACEUTIC-A 誉衡药业 002437 CH RMB 18,795 32.0 n.a. n.a. 6.5 n.a. n.a.

BEIJING SL PHARMACEUTICAL -A 双鹭药业 002038 CH RMB 22,609 39.9 40.4 32.5 6.4 5.7 5.0

JIANGSU YUYUE MEDICAL EQU-A 鱼跃医疗 002223 CH RMB 22,997 62.0 45.3 36.4 10.6 5.6 5.0

SHIJIAZHUANG YILING PHARMA-A 以岭药业 002603 CH RMB 17,830 46.5 32.3 26.8 4.2 3.3 3.0

HAISCO PHARMACEUTICAL GROU-A 海思科 002653 CH RMB 18,041 62.5 n.a. n.a. 10.9 n.a. n.a.

ZHEJIANG CONBA PHARMACEUTI-A 康恩贝 600572 CH RMB 17,374 47.7 27.1 24.3 5.4 3.7 3.2

BEIJING TIANTAN BIOLOGICAL-A 天坛生物 600161 CH RMB 20,912 n.a. n.a. n.a. 9.3 9.9 7.6

TIANJIN CHASE SUN PHARM-A 天津红日药业股份有限公司 300026 CH RMB 18,671 35.2 27.2 23.0 4.0 3.1 2.8

GUIZHOU YIBAI PHARMACEUTIC-A 益佰制药 600594 CH RMB 13,209 88.7 28.5 23.0 4.7 3.3 2.9

GUANGDONG ZHONGSHENG PHA-A 众生药业 002317 CH RMB 10,732 32.3 26.0 22.1 4.7 4.1 3.5

BEIJING BEILU PHARMACEUTIC-A 北陆药业 300016 CH RMB 6,654 322.8 n.a. n.a. 13.1 n.a. n.a.

ZHEJIANG XIANJU PHARMA-A 仙琚制药 002332 CH RMB 7,592 75.8 51.8 35.5 4.3 3.3 3.0

HENAN LINGRUI PHARMACEUTIC-A 羚锐制药 600285 CH RMB 7,161 53.0 38.0 28.8 4.2 3.2 3.0

Simple Average 57.7 34.8 27.9 6.8 5.1 4.4

Weighted Average 46.0 31.7 25.7 7.2 5.4 4.5

15A 16E 17E 15A 16E 17E

SINOPHARM GROUP CO-H 国药控股 1099 HK HKD 107,502 19.1 20.3 18.0 2.4 2.8 2.4

SHANGHAI PHARMACEUTICALS-H 上海医药 2607 HK HKD 60,424 13.1 15.7 13.9 1.3 1.5 1.4

CSPC PHARMACEUTICAL GROUP LT 石药集团 1093 HK HKD 50,291 28.1 23.9 19.6 5.4 4.9 4.2

SINO BIOPHARMACEUTICAL 中国生物制药 1177 HK HKD 43,584 20.8 21.5 18.8 6.7 4.5 3.7

GUANGZHOU BAIYUNSHAN PHARM-H 白云山 874 HK HKD 44,140 18.2 16.4 15.1 2.8 2.0 1.8

CHINA MEDICAL SYSTEM HOLDING 康哲药业 867 HK HKD 32,284 23.7 20.7 17.1 4.5 4.4 3.6

SHANDONG WEIGAO GP MEDICAL-H 山东威高 1066 HK HKD 24,665 17.8 19.0 15.4 1.9 1.8 1.6

3SBIO INC 三生制药 1530 HK HKD 22,208 39.6 26.1 19.5 4.1 3.1 2.7

SIHUAN PHARMACEUTICAL HLDGS 四环医药 460 HK HKD 17,428 18.4 7.9 7.9 3.4 1.3 1.1

TONG REN TANG TECHNOLOGIES-H 同仁堂科技 1666 HK HKD 19,955 25.4 27.0 23.7 3.4 3.2 2.9

LUYE PHARMA GROUP LTD 绿叶制药 2186 HK HKD 18,565 29.8 18.2 16.3 4.0 2.4 2.1

CHINA TRADITIONAL CHINESE ME 中国中药 570 HK HKD 18,391 25.5 15.2 13.0 1.8 1.3 1.2

PHOENIX HEALTHCARE GROUP CO 凤凰医疗 1515 HK HKD 11,289 37.9 35.0 30.0 3.6 5.0 3.8

BEIJING TONG REN TANG CHINES 同仁堂国药 8138 HK HKD 9,576 23.5 21.8 19.2 4.6 4.4 3.7

SSY GROUP LTD 石四药集团 2005 HK HKD 7,624 14.5 16.4 14.9 2.3 2.8 2.6

YICHANG HEC CHANGJIANG PHA-H 东阳光药 1558 HK HKD 8,106 15.9 18.1 14.2 2.6 2.6 2.3

SHANGHAI FUDAN-ZHANGJIANG-H 复旦张江 1349 HK HKD 7,209 50.4 40.4 29.7 8.8 7.2 6.0

CHINA SHINEWAY PHARMACEUTICA 神威药业 2877 HK HKD 6,757 10.3 10.3 10.3 1.3 1.1 1.0

HUA HAN HEALTH INDUSTRY HOLD 华瀚健康 587 HK HKD 3,814 11.3 n.a. n.a. 1.2 n.a. n.a.

THE UNITED LABORATORIES INTE 联邦制药 3933 HK HKD 7,467 63.3 32.6 18.5 1.0 1.1 1.0

BLOOMAGE BIOTECHNOLOGY 华熙生物科技 963 HK HKD 5,101 28.4 19.9 16.1 4.7 3.1 2.6

CONSUN PHARMACEUTICAL GROUP 康臣药业 1681 HK HKD 4,628 17.0 13.2 11.4 2.6 2.1 1.9

LEE'S PHARMACEUTICAL HLDGS 李氏大药厂 950 HK HKD 4,329 24.4 18.5 17.1 3.9 2.6 2.3

PW MEDTECH GROUP LTD 普华和顺 1358 HK HKD 4,026 12.4 14.9 13.1 1.1 1.4 1.2

CHINA PIONEER PHARMA HOLDING 中国先锋医药 1345 HK HKD 3,080 18.0 13.3 11.7 3.1 n.a. n.a.

SINCO PHARMACEUTICALS HOLDIN 兴科蓉医药 6833 HK HKD 937 n.a. 10.7 13.2 n.a. 1.7 1.3

Simple Average 24.3 19.9 16.7 3.3 2.8 2.4

Weighted Average 22.4 20.0 17.0 3.3 2.9 2.5

Name 中文名 Code Currency

Name 中文名 Code CurrencyMkt Cap

(million)

Mkt Cap

(million)P/E P/B

P/E P/B



Financial Summary Balance Sheet

RMB million FY14 FY15 2016E 2017E 2018E

Cash and ST investments 440 2,138 1,225 1,336 1,533

Inventories 418 1,236 2,393 2,753 3,141

Other current assets 1 101 101 101 101

Total Current Assets 2,094 6,873 9,971 11,433 13,059

Property. plant & equipment 960 1,800 2,043 2,324 2,646

Other assets 76 179 179 179 179

Goodwill 1,191 5,390 5,390 5,390 5,390

Deferred tax assets 48 126 126 126 126

Total Non-current Asset 3,237 11,357 11,522 11,725 11,969

Total Assets 5,332 18,229 21,493 23,158 25,028

Trade and other payables 540 2,660 5,152 5,927 6,763

Bank and other loans 502 1,600 1,600 1,600 1,600

Current taxation 48 149 149 149 149

Other Current Liabilities 44 82 82 82 82

Total Current Liabilities 1,134 4,491 6,983 7,757 8,593

Long-term debt 671 850 850 850 850

Deferred taxes 245 901 901 901 901

Total Non-current Liabilities 941 1,900 1,900 1,900 1,900

Total Liabilities 2,075 6,391 8,883 9,658 10,494

Non-equity reserves 0 0 0 0 0

Minority interest 73 708 726 744 762

Common equity 3,184 11,129 11,884 12,756 13,772

Total Equity 3,257 11,838 12,610 13,500 14,534

BPS (RMB) 1.29 2.64 2.81 3.01 3.24

Cashflow Statement

RMB million FY14 FY15E 2016E 2017E 2018E

PBT 489 769 1,289 1,487 1,729

Depreciation and amortization 119 168 245 271 299

Finance cost 64 72 147 147 147

Interest income -2 -96 -132 -100 -112

Operating profit before change in WC 670 863 1,549 1,805 2,063

Funds from other operating activities -252 -195 -1,520 -576 -593

Cash from operating activities 325 519 -165 1,006 1,210

Capital expenditure -95 -226 -409 -474 -543

Acquisition of subsidiaries 0 -7,341 0 0 0

Cash from investing activities -81 -7,158 -278 -375 -431

Long-term borrowings 750 3,387 0 0 0

Net proceeds from issue of shares 0 7,200 0 0 0

Reduction in long-term debt -822 -2,184 0 0 0

Inc (Dec) in short-term borrowings 0 0 0 0 0

Cash from financing activities -150 8,330 -470 -521 -582

Net change in cash 94 1,662 -913 111 197

Net cash - beginning balance 345 439 2,102 1,189 1,300

Net cash - ending balance 439 2,102 1,189 1,300 1,497

Profit & Loss Statement RMB million FY14 FY15 2016E 2017E 2018E

Revenue 2,650 3,709 6,825 7,907 9,043

Cost of sales -1,007 -1,515 -2,935 -3,376 -3,852

Gross profit 1,643 2,194 3,890 4,530 5,191

Other incomes and expenses 32 44 41 48 55

Selling expenses -903 -1,196 -2,116 -2,451 -2,803

Administrative expenses -154 -187 -464 -538 -615

Operating profit 518 699 1,263 1,486 1,709

Interest income 1 96 132 100 112

Interest expense -63 -70 -147 -147 -147

PBT 489 769 1,289 1,487 1,729

Income tax -70 -118 -193 -223 -259

Net Profit 413 622 1,077 1,246 1,452

EBITDA 669 912 1,549 1,805 2,063

EPS (RMB) - Basic 0.16 0.25 0.24 0.28 0.32

EPS (RMB) - Diluted 0.16 0.17 0.24 0.28 0.32

DPS (RMB) 0.000 0.000 0.072 0.083 0.097

Dividend yield 0.0% 0.0% 2.2% 2.5% 2.9%

Financial Ratios

FY14 FY15 2016E 2017E 2018E

Growth (YoY)

Revenue 90.0% 40.0% 84.0% 15.8% 14.4%

Gross profit 99.0% 33.5% 77.3% 16.5% 14.6%

Operating profit 108.3% 34.8% 80.7% 17.7% 15.0%

Net profit 108.1% 50.5% 73.3% 15.6% 16.5%

EPS 68.4% 3.4% 42.5% 15.6% 16.5%

Diluted weighted average shares 23.6% 45.5% 21.6% 0.0% 0.0%

Margin 2014 2015A 2016E 2017E 2018E

Gross Margin 62.0% 59.1% 57.0% 57.3% 57.4%

Operating Margin 19.6% 18.8% 18.5% 18.8% 18.9%

Net Profit Margin 15.6% 16.8% 15.8% 15.8% 16.1%

Efficiency 2014 2015A 2016E 2017E 2018E

Inventory Days 182 149 130 120 120

Trade Receivable Days 201 155 140 140 140

Account Payable Days 218 206 180 180 180

Financial Ratios 2014 2015A 2016E 2017E 2018E

Current Ratio (x) 1.8 1.5 1.4 1.5 1.5

Quick Ratio (x) 1.5 1.2 1.1 1.1 1.1

Net debt/equity 22.5% 2.6% 9.7% 8.3% 6.3%

ROA 7.7% 3.4% 5.0% 5.4% 5.8%

ROE 12.7% 5.3% 8.5% 9.2% 10.0%

Valuation Comparison 2014 2015A 2016E 2017E 2018E

P/B (x) 2.7 1.3 1.3 1.2 1.1

P/E (x) 21.6 20.9 14.6 12.7 10.9

Sources: Company data, CMS (HK) estimates


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Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

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