Healthcare Sector Review - Oriental Patron Sector... · 2016. 6. 30. · Oriental Patron Research 8...
Transcript of Healthcare Sector Review - Oriental Patron Sector... · 2016. 6. 30. · Oriental Patron Research 8...
Healthcare Sector ReviewHealthcare Sector ReviewHealthcare Sector ReviewHealthcare Sector Review
Wed, 08 Sep 2010
How to pick and what to pick? Equity Research
Healthcare/ China.
After significant adjustments in June and July, we believe many stocks with low valuations start to regain interests from investors. In 2H10, we expect price cut policies to affect non-exclusive drugs with multiple manufacturers. This note serves as a stock pick guide in 2H10.
Key Summaries
� Essential drug list (“EDL”, 基 本 藥 物目錄基 本 藥 物目錄基 本 藥 物目錄基 本 藥 物目錄 ) will only benefit pharmaceutical companies with exclusive products
All county hospitals and rural clinics in PRC are obligated to use the 307 drugs on EDL, implying a tremendous growth in volume of those 307 drugs. However, volume growth does not mean margin expansion.
For non-exclusive products, margins are under risk of potential price cut and capacity expansion in industry. Only companies with exclusive products can maintain margins and enjoy volume growth from EDL.
Guangzhou Pharmaceutical (874.HK, BUY, TP: HK$9.86)
� In long run, segment leaders will prevail through consolidations
Tighter pollution and safety regulations drive smaller drug companies out of business. Increasing inter-provincial drug procurements benefits large scales drug distributors. These all lead to consolidations
Segment leaders will survive and become even stronger in consolidations.
Lansen (503.HK, BUY, TP: HK$4.86), Trauson (325.HK, BUY, TP: HK$4.68), Weigao (1066.HK, NR), Lijun (2005.HK, NR) and Sino Pharm (1099.HK, NR)
� Intermediate and bulk drug companies are showing limited growth potential, they are either at fair value or overpriced
They are making commodities, with inherited high volatility. Even worse, many intermediate and bulk drug segments are showing overcapacities, driving margins down.
United Lab (3933.HK, SELL, TP: HK$9.56), China Pharm (1093.HK, NR)
� Invest in highly innovative firms with unique products; their products usually maintain higher margins
High innovation drugs are qualified for patent protections, can enjoy “higher quality, higher price” policy of the government, and most importantly are hard to copy by competitors. Therefore, their higher margins are sustainable.
Lee’s Pharm (950.HK, BUY, TP: HK$4.05) and Sino Biopharm (1177.HK, NR)
� Same quality but lower price, medical device is going to boom
Quality of PRC manufactured medical devices is improved dramatically that we believe some are almost equivalent to the imported devices. We see no difference in quality between domestic and imported medical devices in several years while gap in price is expected to remain wide.
Traunson (325.HK, BUY, TP: HK$4.68), MingYuan (233.HK, BUY, TP: HK$0.97) and Weigao (1066.HK, NR)
John Yung
Oriental Patron Securities Ltd
+852 2842 5871
Oriental Patron Research
8 September 2010 Page 2 of 35
Table of Contents
Policies, a concern but sector is optimistic in long run .......................................................................... 3
Before the policies become substantial, panic takes over .......................................................................... 3
Warning…we anticipate price cut in 2H10 ................................................................................................. 3
Also expecting positive policies in 2H10 .................................................................................................... 3
Healthcare sector will still draw money from investors ............................................................................... 4
The PRC Healthcare Sector Investment Summaries ................................................................................ 5
Companies with exclusive products on Essential Drug List (EDL) are benefited ........................................ 5
Consolidation is irreversible ....................................................................................................................... 6
Intermediates (中間體)and bulk drugs (原料葯) are going to fade .................................................. 7
Innovative companies are going to perform ............................................................................................. 10
Medical devices, high growth potential but with less regulatory risks ....................................................... 11
The PRC Healthcare Sector, in its best era of growth ............................................................................ 14
Unmet robust demands ........................................................................................................................... 14
Medical reform, you can’t stop the train ................................................................................................... 14
Mapping the HK-listed Healthcare Sector ............................................................................................... 16
Companies
Lansen Pharmaceutical (503 HK) ............................................................................................................ 19
Lee’s Pharmaceutical (950 HK) ............................................................................................................... 20
Trauson Holdings (325 HK) ..................................................................................................................... 21
Guangzhou Pharmaceutical (874 HK) ..................................................................................................... 22
Mingyuan Medicare (233 HK) .................................................................................................................. 23
The United Laboratories (3933 HK) ......................................................................................................... 24
China Pharmaceutical (1093 HK) ............................................................................................................ 25
Lijun International (2005 HK) ................................................................................................................... 26
Ruinian International (2010 HK) .............................................................................................................. 28
Shandong Weigeo (1066 HK) .................................................................................................................. 29
Shineway Pharmaceutical (2877 HK) ...................................................................................................... 30
Sino Biopharmaceutical (1177 HK) .......................................................................................................... 31
Sinopharm (1099 HK) .............................................................................................................................. 32
Oriental Patron Research
8 September 2010 Page 3 of 35
Policies, a concern but sector is optimistic in long run Since late June, news about drug price regulations struck the sector. Negative market
sentiments also drove medical device and drug distribution stocks down, though they are not
even mentioned in the policy draft.
Before the policies become substantial, panic takes over
Since the National Development and Reform Commission (NDRC, 發改委) showed its
intention to further regulate margins and price setting mechanisms of the industries, the sector
experienced significant corrections (refer to “A disaster to the industry…Not yet” on 22, June,
2010).
Till today, we observed the regulators had only been restating main themes of existing
policies while no details of solid tightening policies are given.
Warning…we anticipate price cut in 2H10
However, we believe NDRC are serious about the price regulation on finished drugs and we
expect NDRC to release policies in 2H10 with following details:
1) For non-exclusive drugs with wide price range and multiple manufacturers, NDRC is
expected to take reference from the manufacturer with the most efficient cost structure, i.e.
use the existing lowest price as the new standard; higher price non-exclusive drugs will
fail to compete.
2) Exclusive and innovative products are not likely to be affected.
3) Medical device makers and drug distributors are not likely to be affected.
Therefore, you should
A) buy companies with exclusive and innovative drugs.
B) buy medical device and drug distribution sub-sector leaders.
C) avoid companies with majority non-exclusive drugs.
D) avoid intermediate and bulk drug manufacturers; their downstream customers make
non-exclusive drugs.
Also expecting positive policies in 2H10
Equally important, we expect positive policies in “the Twelfth Five-year Plan” (十二五計劃) ,
hopefully in late October
We believe “the Twelfth Five-year Plan” will mention its supports to consolidations of the
drug distribution sub-sector. The Ministry of Commerce has expressed about their future plan
to develop 2-3 “national leaders” (with over RMB100bn revenue) and about 20 “regional
leaders” (with over RMB10bn revenue) in the drug distribution sub-sector, eliminating other
smaller inefficient players.
We also believe “the Twelfth Five-year Plan” should also substantiate beneficial policies to
Oriental Patron Research
8 September 2010 Page 4 of 35
the Biotech sub-sector. In specific, we expect new tax benefits to qualified biotech companies
and cash awards to future biotech drug inventions. From what we heard, the government is
expected to spend RMB10bn to award each “outstanding innovation drug” RMB 5-10mn.
Healthcare sector will still draw money from investors
At this time, we are positive to the sector’s long term prospect while we can hardly argue on
the robust demands on drugs and medical care by the growing PRC patient population. Even
we try to turn around and look at the sector from a depressive view, what is going to happen if
the world economic enters recession again? The answer is no other sectors could be more
attractive than this defensive sector in a yet growing country. We see in the following exhibit
that, historically, healthcare sector has outpaced PRC GDP in growth.
Exhibit 1: PRC GDP Growth vs Healthcare sector revenue growth
0.0%
10.0%
20.0%
30.0%
2004 2005 2006 2007 2008 2009 2010E
GDP Growth Sector Revenue Growth
Source: National Statistics Bureau, Wind China
Oriental Patron Research
8 September 2010 Page 5 of 35
The PRC Healthcare Sector Investment Summaries
Companies with exclusive products on Essential Drug List (EDL) are
benefited
� EDL means higher reimbursements to patients, but not higher margins to companies
The PRC Essential Drug List (EDL, 基本藥物目錄) was published in May 2009 containing
307 inexpensive drugs that provide fundamental medical care to patients. Patients will be able
to reimburse over 90% of EDL drug expense. The government promised to spend an extra
of RMB850bn from 2009 to 2012 to push the medical reform, at least 1/5 of the spending is
for procuring EDL drugs, we estimate.
In 2H10, we believe volume growth of EDL drugs will be significant because Ministry of
Health (衛生部) obligate all rural clinics and county hospitals to tender 100% EDL drugs
before the year end. However, volume growth does not guarantee profit growth for companies.
Most of the EDL drugs are non-exclusive; capacity expansion of existing EDL drug
manufacturers and possible price cut policy of NDRC can drag margins down in long run.
� Only exclusive products can maintain their margin in long term
Exclusive drugs are an exception; the sole manufacturer will be able to maintain high margin
and to enjoy volume growth. In the PRC-listed universe, companies with exclusive products
on EDL include:
Exhibit 2: Companies with exclusive products on EDL
Listed Company Ticker Products Yunnan BaiYao Group (雲南白藥) 000538 CN Yunan Baiyao (雲南白藥) China Resources Sanjiu (華潤三九) 000999 CN Sanjiu Weitai Keli, Zhengtian Wan (三九胃泰顆粒、正天丸) Qianjin Parmacy (千金葯業) 600479 CN Fu Ke Qian Jin Jiao Nang(婦科千金膠囊) Wuhan Humanwell Healthcare (人福科技) 600079 CN Sufentanil Citrate Injection (芬太尼注射劑) Guangzhou Parmaceutical (廣州葯業) 600332 CN/ 874 HK Xiaoke Wan, Huatuo Zaizao Wan (消渴丸、華佗再造丸) Fosun Pharma (復星葯業 600196 CN Xianling Gubao Jiaonang (仙靈骨葆膠囊) Zhongxin Pharmaceuticals (中新藥業) 600329 CN Su Xia Jiu Xin Wan(速效救心丸) Tasly Group (天士力) 600535 CN Compound Danshen Dripping Pills (複方丹參滴丸) Jinlin Parmaceutical Co. Ltd (金陵藥業) 000919 CN Mailuoning Zhusheye (脈絡寧注射液) Merro Pharma (美羅藥業) 600297 CN Shang Ke Jie Gu Pian ( 傷科接骨片) Mayinglong Parm (馬應龍) 600993 CN Musk Hemorrhoids Oitment (馬應龍麝香痔瘡膏) Zhong Heng Group (中恒集團) 600252 CN Zhu She Yong Xue Shuan Tong (血栓通凍乾粉) Source: Company, OP Research
� The only company benefited from EDL in Hong Kong.
Within the Hong Kong listed universe, Guangzhou pharmaceutical (874.HK) is the only
company with two exclusive EDL products.
1) Xiaokewan (消渴丸) accounted for ~50% market shares of TCM (Traditional Chinese
medicine) for diabetes in PRC and ~10% market shares of all diabetes drugs in PRC. It
contributed ~RMB500mn revenue (~15% of total revenue) in 2009. We believe, its relatively
low price (comparing to other western medicines and better accepted by rural population) and
higher reimbursement rate will make its sales double in 3 years.
Oriental Patron Research
8 September 2010 Page 6 of 35
2) Huatuozaizaowan (華佗再造丸), listed as National Tier-1 Confidential Formula (國家一級保密處方), sales of RMB150mn or 4% of the company’s 2009 revenue. Being one of the
crucial TCM for treating growing stroke related diseases, its volume will grow further after its
entry to EDL.
The company is only traded at a FY11 PE of 16X, significantly lower than the peer average of
20X. We recommend BUY at TP HK$9.86
Exhibit 3: Xiaokewan and Huatuazaizaowan
Source: Company
Consolidation is irreversible
� Reasons behind consolidations
Following are reasons for industrial consolidations:
1) To improve product safety, SFDA is enforcing stricter regulations, such as implementing
the new European Good Manufacturing Practice (GMP) standard staring 2011; many
existing plants has to be modified. Many of the smaller companies are unable to afford
the extra Capex and will have to either close down or be bought out.
2) Besides, regulators are enforcing more stringent requirements on pollution preventions
and require add-on constructions such as sewage treatments. Again, money problem for
smaller firms.
3) Latest medical reform policies ask drug manufacturers to limit the number of distributors
from door (of manufacturer) to door (of hospitals).
4) Inter provincial drug procurements have been happening more frequently, benefiting
bigger distributors with interprovincial networks.
5) This month, the Ministry of Commerce has expressed about their future plan in the “the
Twelfth Five-year plan” to develop 2-3 “national leaders” (with over RMB100bn revenue)
and about 20 “regional leaders” (with over RMB10bn revenue) in the drug distribution
sub-sector, eliminating other smaller inefficient players.
While 1) and 2) push consolidations in drug and medical device segments, 3), 4) and 5) push
for consolidations in drug distribution segment. After some years, smaller companies will
not survive while subsector leaders will have acquired their market shares and become
stronger.
Oriental Patron Research
8 September 2010 Page 7 of 35
� Meeting the leaders
In the long run, we believe consolidations will benefit the following companies with leading
positions in their segments:
Exhibit 4: Companies and their market share in the segments
Company Ticker Leading position in… Market
Shares/Ranking
Top 3 Market
Shares Combined
Sinopharm 1099 HK Logistic Distribution ~12% / 1st ~20%
Lijun 2005 HK Plastic Intravenous Infusion Products
(塑膠瓶大輸液)
~15% / 3rd ~57%
Lansen 503 HK DMARDS (風濕病慢作用藥) ~17% / 1st ~35%
Sino Biopharm 1177 HK Hepatitis Therapeutics ~12%/ 3rd ~80%
Weigao 1066 HK Stents (心臟支架) 25%/ 1st ~75%
Trauson 325 HK Trauma Orthopedic Devices ~8%/ 2nd 27%
Source: Company, OP Research,
Intermediates ((((中間體中間體中間體中間體))))and bulk drugs ((((原料葯原料葯原料葯原料葯)))) are going to fade
� It is a commodity business; it is hard to estimate the profit
Intermediate drugs are mostly chemicals to be further processed into drugs; bulk drugs are
raw drug powders before further containing or packaging.
Intermediate drugs and bulk drugs from different suppliers are similar in quality; they are
basically commodities. Company margins are hard to estimate and depend heavily on
frustrating market price/company ASP. The following shows the relationship of company
margins and historical price movements of intermediate drugs (6-APA, 7-ACA, etc.) and bulk
drugs (Amoxillin, Cefotaxime, Vitamin C, etc.)
Exhibit 5: Margins of the United Lab (3933.HK) intermediates depend on
market price
0
200
400
600
800
1,000
1,200
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
6-APA(RMB/Kg) 7-ACA-(RMB/Kg)
Intermediate drugs achieved 3% operating margin in 1H09
Intermediate drugs achieved 12% operatingmargin in 1H08
(RM
B/K
g)
Source: Company, OP Research, Wind China
Oriental Patron Research
8 September 2010 Page 8 of 35
Exhibit 6: Margins of the United Lab (3933.HK) bulk drugs depend on
market price
0
200
400
600
800
1,000
1,200
1,400
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
Amoxilin(RMB/Kg) Cefotaxime(RMB/Kg)
Bulk drugs achieved 6%operating margin in 1H09
Bulk drugs achieved 16%operating margin in 1H09
(RM
B/K
g)
Source: Company, OP Research, Wind China
Exhibit 7: Margins of the China Pharm (1093.HK) fall so does the market
price
0
20
40
60
80
100
120
140
160
Vitamin C (RMB/Kg)
Vitamin C achieved 54%operating margin in 1H09
Vitamin C achieved 43% operating marginin 1H09
(RM
B/K
g)
Source: Company, OP Research, Wind China
� Cursed by overcapacity, margins shrinking
Overcapacity has been observed in intermediate and bulk drug segments for long time; we
still constantly see new entrants to the segments. The follow shows how bad the
overcapacities are in different products.
Exhibit 8: Examples of overcapacities in intermediate and bulk drugs
Product World demand/
Annual
PRC capacity/
Annual
The United Lab (3933.HK)
Capacity/Annual
China Pharm (1093.HK)
Capacity/Annual
7-ACA 4,000ton 7,000 ton 700 ton 1,200 ton
Penicillin 60,000 ton 100, 000 ton 10,000ton 15,000ton
Vitamin C 100, 000 ton 180,000ton NA 32,000ton
Source: Company, OP Research, Wind China
Overcapacity can only drive segment margins down. In long run, we see players in the
segments become marginally profitable.
Oriental Patron Research
8 September 2010 Page 9 of 35
� 2H10 price cut can hit them hard
Both the United Lab (3933.HK) and China Pharm (1093.HK) have finished products, but all
are non-exclusive drugs exposed to potential NDRC price cut in 2H10.
For non-exclusive drugs with wide price range and multiple manufacturers, NDRC is
expected to take reference from the manufacturer with the most efficient cost structure, i.e.
use the existing lowest price as the new standard; higher price non-exclusive drugs will fail to
compete.
While we believe NDRC is likely to first cut price of non-exclusive EDL(基本藥物目錄)
drugs, China Pharm has about 1/3 of their finished products listed on EDL list and the United
Lab also has about 1/3 of their 34 finished products listed on EDL.
� Selling new finished products might not solve the problem
Companies understand the problem with shrinking margins and they want to rely on
introducing new finished products to boost future growth. However, we think this might not
solve the problem because:
� usually their new products are second tier technology drugs facing fierce competitions
� they need to invest a lot of time and money to develop totally different channels
For instance, the United Lab (3933.HK) launched in early FY10 their “second generation
insulin” (二代胰島素) product into the market, which is already saturated by foreign and
domestic players. In the long run, we believe the technology advanced “third generation
insulin” will take over “second generation insulin”.
Exhibit 9: Insulin market shares in PRC
Novo Nordisk z(諾和諾德)
75%
Lilly (禮來)
11%
Sanofi-Aventis (賽諾菲-安萬特)
2%
Gan & Lee (甘李)
2%
Dong Bao (東寶)10%
Source: Company, OP Research
More importantly, the United Lab has been selling only antibiotics (抗生素). For insulin, they
will need to build totally different channels in hospitals. This could means 2-3 years of efforts
for their sales force and extra SG&A expenses (finished product segment margin dropped
from 24.7% in 1H09 to 21.7% as SG&A up 33% to HK$633mn). We believe, their insulin
product might not be able to break even in 2011 while its 2012 contribution is questionable.
Oriental Patron Research
8 September 2010 Page 10 of 35
� Pricy stocks?
The United Lab (3933.HK) is trading at FY10 PE of 19X(FY11 PE of 16), we think this is
demanding for a company whose revenue still rely heavily on intermediate and bulk drugs
(~65% revenue in 2009) and risks heavy price cut to their finished products. We recommend
SELL at TP $9.56.
On the other hand, China Pharm (1093.HK) is less active on moving towards finished
products, 70% of 2009 revenue is from intermediate and bulk drugs. While it is trading at
FY11 PE of 11X, we believe the valuation is not attractive at this time.
Innovative companies are going to perform
� Generic drugs, no more fat margins
Making generic drugs can establish cash flow quickly, but the cash flow also drains quickly
when everybody rushes to make the same drug. Tendency of the government is clear: they
want companies to focus more on R&D and discovering new drugs.
Currently, only new drugs are protected by an exclusive patent period. In future, NDRC (發改委) is expected to only allows patented new drugs and the “first followers” (首仿者) to set
their price with reference to costs and global prices, resulting in higher margins. For the
“second followers” and the “third followers”, they can only set their generic drug price 10%
and 20% below that of the “first follower”, resulting in lower margins. The regulation
substantially discourages companies from making generic drug
Exhibit 10: Expected pricing policies of NDRC
Drug Category NDRC price guideline
Innovative patented new drugs Priced with reference to costs and global prices, highly flexible
“First follower” generic drug Priced with reference to costs and global prices, usually significantly
lower than price of new drugs
“Second follower” generic drug Priced10% lower than that of “First follower” generic drug
“Third follower” generic drug Priced 20% lower than that of “Second follower” generic drug
“Forth follower” generic drug Price capped by price of “Third follower” generic drug
Source: NDRC, OP Research
Moreover, we expect the “the Twelfth Five-year Plan” to mention substantial incentives to
drug innovations. From what we heard, the government is expected to spend RMB10bn to
award each “outstanding innovation drug” RMB 5-10mn.
In the future, we see generic drug makers to suffer from low margins and fierce competitions
while innovative firms dominate.
� Innovations pay off, buy companies with new drugs
In our view, companies focusing on new drug discoveries will be long term winners in the
PRC pharmaceutical industry, because they enjoy:
� favourable policies, such as “higher quality, higher price” (優質優價) and other tax
incentives.
� better patent protections, while they have 10-15 years selling the exclusive products.
� higher margins, when you compare to those of generic drugs.
� rich pipelines, to fuel long term growth of the company.
Oriental Patron Research
8 September 2010 Page 11 of 35
We believe there are only two companies in Hong Kong listed universe that is qualified as
innovative firms, and they are: Sino Biopharm (1177.HK) and Lee’s Pharm (950.HK).
Sino Biopharm (1177.HK) focuses on cardio-cerebral, hepatisis, oncology and analgesic
medicines. Out of their >12 major products, 7 products contribute more than RMB100mn in
2009. We believe products with high growth potentials and pioneering innovations will come
out from the company. After significant downward adjustments in previous weeks, its current
valuation at FY11 PE of 22X is attractive, we believe.
Lee’s Pharm (950.HK), focusing on heart disease, cancer and gynaecology drugs is expected
to grow its profit by >50% in 2010 and ~30% afterwards. Three of its products are looking
forward to sell over the critical revenue level of HKD100mn in the future two years. Also
downward adjusted recently, the current valuation at FY11 PE of 14X is cheap, in our view.
We recommend BUY at TP $4.05.
Medical devices, high growth potential but with less regulatory risks
� Closing up the gap with foreign players
In recent years, the domestic medical device industry advanced dramatically. Many
companies have successfully moved from fundamental devices (e.g. needles and syringes,
with lower margin) to sophisticated devices (e.g. heard implant devices, higher margin). Some
domestic companies established significant sales overseas, proving that foreign doctors
confirmed quality of domestic products. Indeed, many domestic products have been selling
OEM products to their international competitors for years. This shows that domestic products
have reached same technology and quality level as their foreign counterparts, although they
are selling at a significantly lower price.
Even better, all of the recent policies didn't imply any tightening regulations to the device
subsector; it is the best era for the medical device subsector.
� Backed by strong demands, domestic brands taking over
Medical reform also benefits the medical device subsector. From the RMB850bn fiscal
spending for the medical reform, at least 1/5 is estimated to be for building rural medical
facilities which includes vast amount of medical device procurements, we estimate. Moreover,
we believe these government procurements will mainly buy from domestic device makers
rather than their foreign counterparts. Thus, market of domestic medical devices such as stents
and orthopedic products are expected to grow significantly in the coming years
PCI (percutaneous coronary intervention, 冠脈手術) are procedures to implant stents to
patient bodies. While the PRC market of stents (支架) is about RMB25bn in 2009,we believe
that only ~4% of the patient demand is met. Therefore, we believe the market will grow at a
CAGR of >30% in the coming years. Exhibit 10 shows the comparison on population and
annual PCI procedure counts of three countries. We can see the huge growth potential of PCI
procedures once it catches up with the developed countries.
Oriental Patron Research
8 September 2010 Page 12 of 35
Exhibit 11: National population and PCI procedures
0
200
400
600
800
1,000
1,200
1,400
0
200
400
600
800
1,000
1,200
1,400
US Japan PRC
Population (mn) PCI (000')
Po
pu
lati
on
(M
n)
PC
I p
roced
ure
s ('0
00)
Source: Company, OP Research
� Domestic domination is proven in history
In Exhibit 11 we see currently 75% of market share is acquired by domestic players; back in
2006 over 90% market share was occupied by international players.
Exhibit 12: Market share change in PRC stent market
Beijing Lepu25%
Weigao#
25%
2009
3 Internatioanl players*25%
Shanghai Microport25%
2006
Domestic players~10%
International players~90%
Source: Company, OP Research. * Three international players are Johnson & Johnson (JNJ), Medtronic (MDT), and Boston Scientific (BSX); #Stents of Weigao are sold under subsidiary Jiwei.
Orthopedic products with a PRC market size of about RMB 6.0bn in 2009 and domestic
market share is below 20%; we believe domestic companies are going to dominate the
orthopedic market following the stent example. Looking forward, the market is expected to
grow at a CAGR~30%.
� Medical device companies in spotlight
Weigao (1066.HK) is the all around medical device supplier with products ranging from
medical consumables, orthopedic devices and heart surgery stents to blood purification
products. While the company ‘s consumable, stents and orthopedic products are expected to
grow over 30% each year, its blood purification products should achieve >100% growth in the
coming 2- 3 years, we estimate.
Oriental Patron Research
8 September 2010 Page 13 of 35
On the other hand, Trauson, focuses only on orthopedic devices. While its trauma products
(11% market shares) and spine products (3% market shares) rank the 3rd
and the 6th
in PRC.
The company profit is expected to grow at a CAGR of 30% in the coming three years.
While Weigao (1066.HK) and Trauson (325.HK) are both quality device companies in the
HK-listed universe. We believe Trauson (trading at FY11 PE of 18X) is more attractive in
valuation than Weigao (trading at FY11 PE of 35X), and therefore should be preferred. We
recommend buying Trauson at TP HK$4.68.
Oriental Patron Research
8 September 2010 Page 14 of 35
The PRC Healthcare Sector, in its best era of growth
Unmet robust demands
We can hardly argue about the PRC’s fast growing GDP and the rising healthcare awareness
of its population. To catch up with developed countries on healthcare expenditure, sector
revenues are going to grow constantly.
On the other hand, we believe the majority of patient populations are not being treated
because of the current low coverage rate of medical care system. Medical reform is expected
to be the solution.
Exhibit 13: Healthcare Expenditure as % GDP
0
2
4
6
8
10
12
14
16
(%)
Source: Company, OP Research, Ministry of Health
Exhibit 14: Treatment rate of some major diseases in PRC
Disease Infected Population Treatment rate
Diabetes ~100mn ~15%
Coronary Heart disease ~20mn ~5%
Cancer ~11mn ~10%
Source: Company, OP Research, National Statistics Bureau
Medical reform, you can’t stop the train
The ultimate goal of medical reform is to establish a basic, universal healthcare framework to
provide Chinese citizens with safe, efficient, convenient and affordable healthcare.
� Step 1: from 2009-2011, to increase the accessibility while reducing the cost of healthcare
and to build up network of basic healthcare facilities, expand the coverage of the public
medical insurance system to cover >90% of the population and to reform the drug supply
and public hospital system.
� Step2: 2011 to 2020, to establish a universal healthcare system. The entire population
should be covered by public medical insurance; drug and medical services should be
accessible and affordable to citizens in all public healthcare facilities.
� Starting from 2010, subsidy for each participant in Urban Resident Program increases
from RMB40 to RMB 120, subsidy for each participant in New Urban Insurance Scheme
Oriental Patron Research
8 September 2010 Page 15 of 35
Program increases from RMB80 to RMB 120.
� To build 29,000 rural clinics in 2009, an additional 5,000 rural clinics, 2,000 county
hospitals and 2,400 urban community clinics in under-developed areas.
In our view, medical reform is irreversible, the robust demand it brought makes the PRC
healthcare sector defensive yet fast growing in the coming years.
Oriental Patron Research
8 September 2010 Page 16 of 35
Mapping the HK-listed Healthcare Sector Since the IPO of Sinopharm (1099.HK) in 2009, the healthcare sector in Hong kong
constantly gains more investor attentions. In exhibit 15 we selected HK-listed companies in
the sector and tried to map them according to different sub-sectors (such as chemical drugs
and medical devices, the vertical scale) and their positions in the industrial value chain (from
intermediate drugs all the way to channels, the horizontal scale).
While you see most of the companies are only manufactures of finished products, companies
like the United Lab (3933.HK) and China Pharm (1093.HK) span also the upstream
intermediates and bulk drugs, companies like Guangzhou Pharmaceutical (874.HK) also has
business in distribution and retails.
In exhibit 16, we try to summarize the characteristics of each of these sub-sectors in the
HK-listed universe.
Lastly, exhibit 17 shows the ongoing growth trend of the whole PRC healthcare industry,
broken down in segments.
Oriental Patron Research
8 September 2010 Page 17 of 35
Exhibit 15: Mapping major HK-listed companies in the sector
Bulk Medicines
Intermediates Finished Products
To other companies
Distributors
Other Distributors
Channels
Retailers
325 HK
233 HK
1099 HK
� Distribution: 93%
� Retail: 3%
� Amino Acid Supplements: 80%
� Health Drink:19%
� Other Drugs:1%2010 HK
� TCM: 51% � Distribution and Retail: 49%874 HK
� Intermediate: 46%
� Bulk Medicines: 26%
� Finished Products 28%1093 HK
� Injections: 57%
� Granules:17%
� Soft Capsules: 24%
� Others:2%2877 HK
� Other Drugs: 20%� Intravenous Infusion: 37%
� Antibiotics:43%2005 HK
� Rheumatology drugs:69%
� Medical plant extract:19%
� Generic drugs: 12%503 HK
� Oncology: 6%
� others: 27%
� Hepatitis : 48%
� Cardio-Cerebral:19%1177 HK
� Cardio: 45%
� Surgical: 30%
� Infection: 8%
� Others: 27%950 HK
� Consumables: 81%
� Orthopetic: 7%
� Blood Purification: 4%
� Others: 8%8199 HK
� Trauma: 66%
� Spine: 21%
� OEM: 9%
� Other: 4%325 HK
� Protein Chip: 82%
� Healthcare screening: 10%
� Medical Center: 8%233 HK
Su
pp
lem
en
ts
� Intermediates: 17%
� Bulk Medicines:48%3933 HK
� Finished Products:35%
TC
MC
hem
ical
Bio
Devic
es
Source: Company, OP research. *TCM = Traditional Chinese Medicine, Bio = Biotech drugs, Chemical = Chemical Drugs, Devices = Medical Devices, Supplements = Health Supplements,
Oriental Patron Research
8 September 2010 Page 18 of 35
Exhibit 16: Characteristics of sub-sectors
• Properties:
� Most of drug makers in PRC fall into this Subsector � Easier to copy many generic drugs � Lower in margin
� Antibiotics and aspirin fall into this category • Average Gross Margin*: 47%
• Total sales in 2009: RMB521bn
* Selected samples In HK-Listed universe
Chemical Drugs
• Properties:
� High tech and represents the latest trend � More demanding procedures, so harder to copy � Usually higher in margin
� Products are usually proteins • Average Gross Margin*: 70%
• Total sales in 2009: RMB
• Properties:
� With the longest history in PRC � Usually cheaper in price and popular in rural areas � Same product in different brand varies in quality and price
� Hard to scientifically quantify the effectiveness • Average Gross Margin*: 50%
• Total sales in 2009: RMB268bn
• Properties:
� Technology and quality advancing fast � Domestic companies focus on mid to low end market � Domestic companies acquiring higher market shares
� High Margin • Average Gross Margin*: 62%
• Total sales in 2009: RMB100bn
• Properties:
� High Margin � Low regulatory risk � Behavior similar to commercial stocks
� High SM&A cost • Average Gross Margin*: 69%
• Total sales in 2009: RMB58bn
Biotech
TCM
Devices
Health Supplements
Source: Company, OP Research
Exhibit 17: Turnover of selected sub-sectors
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
2003 2004 2005 2006 2007 2008 2009 2010*
(RM
B m
n)
SupplementCAGR: 10%
DeviceCAGR:32%
BiotechCAGR:24%
TCMCAGR:20%
ChemicalCAGR:18%
CAGR of Total Turnover: 20%
Source: Company, OP Research
Oriental Patron Research
8 September 2010 Page 19 of 35
Lansen Pharmaceutical (朗生醫藥)
Target Price: HK$4.86 (+40%) Price: HK$3.48 HKEx Code: 503
Leader in the niche of DMARDS Lansen is the leader in PRC DMARDS market, holding ~25% market share.
DMARDS (風濕病慢作用藥), one kind of rheumatic drug (風濕病藥), accounts for 1/5 of the overall rheumatic drug market which was about RMB60bn in 2009.
While the overall PRC rheumatic drug market is growing at a CAGR over 18%, PRC DMARDS sector grows at 29.2% CAGR.
Leveraging on the established network While we estimate the PRC rheumatic disease population to be over 50mn, the
disease ranks 4th
in the PRC chronic diseases and is undertreated. Most of the older
patients simply accept the chronic disease without seeking out professional medical
care. This is going to change along with the increasing medical care coverage and rising life quality being pursued.
Currently, all of Lansen’s rheumatic drugs are in the National Medical Insurance
Reimbursement List; patients can seek 80% to 100% reimbursements using the
company’s products. Lansen serves over 1000 hospitals which include all the
hospitals with rheumatology departments and the hospitals with high potential to
open one. In particular, the company has maintained relationships with most of the rheumatology specialists in PRC hospitals.
We think this established network is the core completive edge of the company
comparing to its competitor. We believe the company can leverage on the network
and capture the future high growth of rheumatic drugs in PRC.
The risk: most of the key products are not self-developed 5 out of the 6 core rheumatic drugs being sold are licensed in; that is, Lansen is only
being the sole distributor in PRC and the roles of sole distributor are subjected to contract renewals.
However, most of the distribution relationships have been lasted for long time and
original product makers developed reliance on the distribution interwork of Lansen. Therefore, we believe chance is slim for Lansen to lose their distributorships.
Undervalued
The stock is currently trading at FY11 PE of 15X, significantly lower than the peer
average of 20X. Given the company’s leading position in selling rheumatic drugs in
PRC, we don’t think the company deserve any discount. We used FY11 PE of 20X
and the Bloomberg consensus FY11 profit of HK96mn; we recommend BUY at TP
HK$4.86.
BUY
Key Data
Close price (HK$) 3.48
12 Months High (HK$) 5.25
12 Month Low (HK$) 3.08
3M Avg Dail Vol. (mn) 2.68
Issue Share (mn) 415.00
Market Cap (HK$mn) 1,444.20
Free Float % 37.58
Net cash/share (HK$)
Net debt/equity (%) 52.72
Fiscal Year 12/2009
Major shareholder (s) Cathay Int'l (50.6%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
0.0
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Company Background
The principal activities of the Group are engaged in
the development, production and sale of specialty
prescription western pharmaceuticals for the
treatment of autoimmune rheumatic diseases in the
PRC.
The “5-pillar” Analysis
5
3
44
5
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit A: Investment Summary
Year to Dec (USD mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 24.2 37.1 47.9 20.8 28.4
Growth (%) - 53.7 29.1 n/a 36.3
Net Income (mn) 0.4 5.1 7.4 3.4 5
Growth (%) - 1,074.3 45.5 n/a 49.2
Gross margin (%) 68.1 70.1 67.7 68.1 65.4
Profit margin (%) 1.8 13.7 15.4 16.2 17.6
ROE (%) na 23.2 28.0 na na
ROA (%) na 9.5 11.9 na na
EPS na na na na na
P/E (x) na na na na na
P/B (x) na na na na na
Dividend yield (%) na na na na na
EV/EBITDA (X) na na na na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 20 of 35
Lee's Pharmaceutical (李氏大藥廠)
Target Price: HK$4.05 (+35%) Price: HK$3.01 HKEx Code: 950
Multiple pipelines fueling the growth
While product pipeline decides future profitability of a pharmaceutical company,
Lee’s Pharm ensures new product continuity by sourcing from 1) in-house R&D, 2)
partnerships in international drug discovery projects and 3) being sole-distributors of
foreign pharmaceuticals.
The model is not so easily copies by others as 2) and 3) requires thorough
understanding to the international pharmaceutical industry (CEO of the company
worked in the US pharmaceutical companies for over 20 years) and good
relationships with foreign companies (the company gets connections from its
American and European strategic investors).
Focusing on 4 rising urban disease sectors in PRC
1) Heart diseases, currently 250mn patients in China, 2) Cancers, there were about
11 mn cancer patients being diagnosed in PRC, 3) Gynopathy diseases (婦科病),
there were 150mn gynopathy disease patients being diagnosed in 2008,
4)Dermatology diseases(皮膚病), there were about 60mn dermatology disease
patients being diagnosed in 2008 Main products and their contributions
High growth supported by existing and new products
For existing products, Livaracine®
(heart disease drug) had just gained the “better
quality, higher price (“優質優價”) approval and has increased the retail price by
40% since January 2010, Carnitene®
(heart disease drug) and Slounase®
(surgery
drug) entered the national medical insurance reimbursement list since Jun 2010.
The company has plans to promote its 2010 launched products, especially Zanidip®,
the drug to treat hypertension. In 2009, hypertension patient population is larger than
200mn, or about 20% of national population. However, only approximately 25% of
these patients are treated.
To further promote its new products, the company plans to expand its sales force
from 150 to 300 people by the end of 2010. We estimate Zanidip® to start
contributing about RMB10mn revenue in 2010 and will grow at CAGR over 100%
in the future three years.
We believe the company will grow at over 35% CAGR for the future three years
while FY10 profit is expected to grow over 50% yoy. We reiterate BUY with a
target price at HK$4.05.
BUY
Key Data
Close price (HK$) 3.01
12 Months High (HK$) 4.18
12 Month Low (HK$) 0.88
3M Avg Dail Vol. (mn) 0.32
Issue Share (mn) 450.58
Market Cap (HK$mn) 1,356.25
Free Float % 31.48
Net cash/share (HK$) (0.10)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Lee's Family (40.0%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
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%950 HK MSCI CHINA
Company Background
The principal activities of the Group are engaged in
manufacture and sale of self- developed
pharmaceutical products, trading of license-in
pharmaceutical products.
The “5-pillar” Analysis
5
5
54
5
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit B: Investment Summary
Year ended Dec (HK$mn) FY09A FY10E FY11E FY12E 1H09 1H10
Revenue (mn) 173.8 259.1 356.7 491.1 76.6 105.3
Growth (%) 38.6 50 38 38 n/a 37.5
Net Income (mn) 46.4 68.1 88.3 117.7 20.1 26.3
Growth (%) 65.2 48 30 33 n/a 30.8
Gross margin (%) 72 72 72 72 72 72
Profit margin (%) 27 26 25 24 26. 25
ROE (%) 40 34 33 32 na na
ROA (%) 29 27 26 26 na na
EPS 0.10 0.15 0.20 0.26 na na
P/E (x) 28 20 12 10 na na
P/B (x) 9 5 4 3 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 21 of 35
Trauson Holdings (創生控股)
Target Price: HK$4.68 (+30%) Price: HK$3.59 HKEx Code: 325
Doing well in its niche The company, though with incomparable scale and product variety to Weigao, performs in the niche of PRC orthopedic device (including trauma, spine and joint products) subsector. Market share of Trauma: 8.4%, the largest domestic maker. Market share of Spine: 3%, 2nd largest domestic market. The following shows ranking and market share of players in
Tapping into the joint orthopedic market While you might realize that the company sells no joint products now, they are entering the market by first distributing joint products of a Taiwanese orthopedic manufacturer.
In the future, the company will release joint products in their R&D pipeline and leverage on their existing distribution channels. The potential is high as we believe PRC joint orthopedic market is going to grow at ~35% CAGR in the coming years, among the highest of the other two segments (Trauma: expected CAGR~25%, Spine:CAGR~30%)
Substitutes to foreign brands Same story as Weigaos’s, the company makes OEM products for many foreign orthopedic device companies, including Medtronic (MDT.US). With almost the same quality and the existing price discount, company is going to further acquire existing market share of foreign players
Undervalued While Trauson is in the same medical device sub-sector as Weigao (1066.HK) and enjoys a similar high growth rate, its smaller market cap and its shorter listed history should make it deserve a discount on valuation, we believe. We did our back-of-envelope calculation using FY11 PE of 24X (30% discount to Weigao’s FY11 PE of 35X) and using the Bloomberg consensus FY11 profit of HK151mn; our TP is at HK$4.68, BUY.
BUY
Key Data
Close price (HK$) 3.59
12 Months High (HK$) 3.96
12 Month Low (HK$) 3.21
3M Avg Dail Vol. (mn) NA
Issue Share (mn) 774.33
Market Cap (HK$mn) 2,779.84
Free Float % 38.28
Net cash/share (HK$) -
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Xu Yan Hua (67.2%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
2.9 3.0
3.1 3.2 3.3
3.4 3.5
3.6 3.7
3.8 3.9
Jun-10 Jul-10 Aug-10
Company Background
The principal activities of the Group are engaged in
design, manufacturing and sale of a broad range of
trauma and spine orthopaedic implants under the
brands Trauson and Orthmed and related surgical
instruments in China.
The “5-pillar” Analysis
4
4
45
4
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit D: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10Revenue (mn) 131.6 173.7 211.5 88.6 120.3 Growth (%) 32.0 21.8 n/a 35.8Net Income (mn) 55.7 64.8 82.2 32.7 37.4 Growth (%) na 16.4 26.8 n/a 14.3
Gross margin (%) 59.0 66.1 70.6 69.6 72.5Profit margin (%) 42.3 37.3 38.9 36.9 31.1ROE (%) na 54.7 42.5 na naROA (%) na 29.8 27.6 na naEPS 0.2 0.1 0.2 na naP/E (x) 22.44 29.92 23.93 na naP/B (x) na na na na naDividend yield (%) na na na na naEV/EBITDA (X) na na na na na
Source: Bloomberg, OP Research
Exhibit C: Market share and ranking in PRC othorpedic market
Trauma Market Rank Company Name Market Share (PRC)
1 Synthes, Inc. US & Switz. 13.8%2 Trauson PRC 8.4%3 Kanghui Medical PRC 5.1%4 Shangdong Weigao PRC 3.6%5 Beijing Libeier PRC 2.7%6 Tianjin Walkman Biomateriald PRC 2.3%Spine Market
1 Medtronics, Inc. US 13.3%2 Johnson & Johnson (Depuy) International 11.1%3 Shangdong Weigao PRC 8.1%4 Synthes, Inc International 7.4%5 Styker Corporation International 5.7%6 Trauson PRC 3.0%
Source: Company, OP Research
Oriental Patron Research
8 September 2010 Page 22 of 35
Guangzhou Pharmaceutical (廣州藥業)
Target Price: HK$9.86 (+22%) Price: HK$8.05 HKEx Code: 874
New force to historical repudiated brands
The leading TCM company in China composed of 12 subsidiaries, 400 products
ranging from prescription drugs to herbal teas with 40 out of that included in the
“National protedted Chinese medicine list” (中藥保護品種) Intangible but valuable
assets include famous brands like “Wang Lao Ji” (王老吉) and “Pan Gao Shou” (潘高壽), Jingxiutang (敬修堂), Chenliji (陳李濟) while the earliest was established in
1600s.
Starting in 2004, the company brought in investors and formed JV on brand
“Wanglaoji” to bring in new strategies to the state own management; revenue of
“Wanglaoji” since then grew over 200% in three years. In the future, we believe the
company will apply the same business model to its other brands with high potentials.
Only HK-listed company with exclusive products on EDL
While the company has more than 10 products listed on EDL (Essential Drug List,基本藥物目錄), two are exclusive. While all EDL products will grow in volume
from tenders of all rural medical facilities in 2H10, two exclusive products listed
below can also maintain a stable margin in long run.
1) Xiaokewan (消渴丸) accounted for ~50% market shares of Traditional
Chinese Medicine (TCM) for diabetes in PRC and ~10% market shares of all
diabetes drugs in PRC. It contributed ~RMB500mn revenue (~15% of total
revenue) in 2009. We believe, its relatively low price (comparing to other western
medicines and better accepted by rural population) and higher reimbursement rate
will make its sales double in 3 years.
2) Huatuozaizha (華佗再造丸), listed as National Tier-1 Confidential Formula (國家一級保密處方), sales of RMB150 mn or 4% of the company’s 2009 revenue.
Being one of the crucial TCM for treating stroke related diseases, its volume will
grow further after its entry to EDL.
Low valuation
The stock is currently trading at FY11 PE of 16X, significantly lower than the peer
average of 20X. The company owns many valuable brands and popular products; we
expect future improvements to operation to be successful and the company deserves
higher than its current valuation. Using FY11 PE of 20X and using the Bloomberg
consensus FY11 profit of HK385mn ; we recommend BUY at TP HK$9.86.
BUY
Key Data
Close price (HK$) 8.05
12 Months High (HK$) 9.44
12 Month Low (HK$) 3.53
3M Avg Dail Vol. (mn) 1.79
Issue Share (mn) 219.90
Market Cap (HK$mn) 10,707.83
Free Float % 100.00
Net cash/share (HK$) (0.78)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Guangzhou Pharm. (48.2%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
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%874 HK MSCI CHINA
Company Background
The Group is principally engaged in the
manufacture and sales of Chinese Patent Medicine
(CPM); wholesale, retail, import and export of
western and Chinese pharmaceutical products and
medical apparatus; and research and development
of natural medicine and biological medicine.
The “5-pillar” Analysis
3
3
44
5
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit E: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 11,873.5 3,450.6 3,802.4 1,903.0 2,282.8
Growth (%) 15.9 -70.9 10.2 -8.0 20.0
Net Income (mn) 320.3 181.8 214.9 118.8 169.4
Growth (%) 46.9 -43.2 18.2 -20.5 42.6
Gross margin (%) 15.1 29.1 26.6 24.5 27
Profit margin (%) 2.7 5.3 5.7 6.3 7.4
ROE (%) 10.6 5.7 6.4 na na
ROA (%) 5.3 3.4 4.9 na na
EPS 0.4 0.2 0.3 na na
P/E (x) 20.38 35.94 30.38 na na
P/B (x) 2.06 2.01 1.89 na na
Dividend yield (%) 1.54 0.50 0.62 na na
EV/EBITDA (X) 21.3 38.2 45.0 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 23 of 35
Mingyuan Medicare (銘源醫療)
Target Price: HK$0.97 (+7%) Price: HK$0.91 HKEx Code: 233
Pioneer in preventative screening of diseases
The company provides solutions to early detection and prevention of disease in PRC.
Its products include: 1) C-12 cancer screening chip, which check patients for 10
cancers on one chip and 2)HPV cervical cancer screening kit is to check female
patients for the 13 high-risk HPV viruses and 3)H1N1 testing kit and 4) Tuberculosis testing kit.
Slower growth in 2010, catalyst ahead
We think the 1H10 results revealed that growth in both products C-12 (96% of
expected FY10 revenue) and HPV testing kits are below the previous guidance of
the company and we believe the slow growth will continue in 2H10.
We think, while the company should remain a slow growth of ~5% in short term,
any unanticipated catalysts (such as the possible C-12 entrance to National Medical
Insurance Reimbursement List) can bring significant re-rating to the stock.
Attractive price after adjustments
However, we believe the stock is trading close to fair value and with limited
downside risk after the previous adjustments. We believe the company has a
spectrum of well equipped products. Riding on the tide of medical reform and the
improve health awareness of PRC population; the company should grow with the
whole medical sector.
The stock is trading at a FY11 PE of 18X and we reiterate BUY at TP HK$0.97.
BUY
Key Data
Close price (HK$) 0.91
12 Months High (HK$) 1.62
12 Month Low (HK$) 0.68
3M Avg Dail Vol. (mn) 10.36
Issue Share (mn) 3,732.02
Market Cap (HK$mn) 3,396.14
Free Float % 52.68
Net cash/share (HK$) (0.07)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Yao Yuan & Family (27.0%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
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%233 HK MSCI CHINA
Company Background
The principal activities of the Group are engaged in
manufacture and trading of protein chips and
equipments, provision of cervical cancer care and
operation of Shanghai Woman and Child Healthcare
Hospital of Hong-Kou District, Shanghai, the PRC,
and Medical Centres Management.
The “5-pillar” Analysis
5
4
25
4
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit F: Investment Summary
Year end Dec (HKD ) FY09A FY10E FY11E FY12E 1H09 1H10
Revenue (mn) 394.3 447.5 509.7 584.6 208 233.9
Growth (%) 20.9 13.5 13.9 14.7 35.0 12.5
Net Income (mn) 76.8 155.6 171.3 189.6 88.7 91.3
Growth (%) -48.8 102.6 10.1 10.7 8 3
Gross margin (%) 81.0 79.4 78.6 77.6 81.5 79.5
Profit margin (%) 19.5 34.8 33.6 32.4 42.7 39.0
ROE (%) 6 12.0 11 11 na na
ROA (%) 5 8 8 8 na na
P/E (x) 37 23 20 18 na na
P/B (x) 1.1 1.8 1.6 1.5 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 24 of 35
The United Laboratories (聯邦制藥)
Target Price: HK$9.56 (-39%) Price: HK$15.70 HKEx Code: 3933
Finished drugs, hit hard if 2H10 price cut
All of the company’s finished drugs are non-exclusive and is exposed to potential NDRC price cut in 2H10. While we believe NDRC is likely to first cut price of non-exclusive EDL (基本藥物目錄) drugs, the United Lab also has about 1/3 of their 34 finished products listed on EDL.
Relying on intermediate and bulk drugs, bothered by unstable
margins and overcapacity
The company relies on contributions from intermediates and bulk drugs. In FY09, 65% of revenue is from them. Like China Pharm (1093.HK), the company is affected by the unstable margin (led by market price volatility) and overcapacities.
Outstanding vertical integration helps ease the harm of price volatility, but overcapacity concern remains
On the bright side, the company has well managed vertical integration system. The company has its finished products Amoxicillin and Ampicillin (both are the downstream made out of intermediate and bulk drugs) awarded “better quality, better price”(優質優價) and can be sold at 40% retail premium than its competitive products. The company has higher flexibilities shifting revenues to downstream.
However, the defensive mechanism does not change the growing overcapacities of intermediate and bulk drugs in PRC. Eventually, profit margin of the segments is in the trend going down.
Overpriced, as a commodity company
While the company plans to sell more finished products in the future, the first thing will be launching its “second generation” insulin product in 2H10. However, we are not too optimistic about the success of this new product because 1) it is the product with dated technology (most of the market players are moving towards the “third generation” insulin and 2) it will take the United Lab years to develop totally different channels in hospitals.
Comparing to China Pharm (1093.HK), we think the company has better vertical integration and higher operational flexibilities but falls into the same business sub-sector: intermediate and bulk drugs. We think the company should at most trade at 20% premium over China Pharm’s FY10 PE of 8.7X, or 10.4X Using the FY10 PE of 10.4X and the Bloomberg consensus FY10 profit of HK960mn; we recommend SELL at TP HK$9.56.
SELL
Key Data
Close price (HK$) 15.70
12 Months High (HK$) 15.76
12 Month Low (HK$) 2.80
3M Avg Dail Vol. (mn) 3.44
Issue Share (mn) 1,250.00
Market Cap (HK$mn) 19,625.00
Free Float % 26.42
Net cash/share (HK$) 1.87
Net debt/equity (%) 70.11
Fiscal Year 12/2009
Major shareholder (s) Choy Kam Lok & family
(65.4%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
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%3933 HK MSCI CHINA
Company Background
The Group is engaged in the manufacture and sale
of antibiotics finished products, the bulk medicine
and intermediate products. Moreover, the Group
also produces and sells small amounts of cough
syrup, anti-allergy medicine and capsule casings.
The “5-pillar” Analysis
3
2
32
2
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit G: Investment Summary
Year to Dec (HKD mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 2,594.9 3,755.9 4,643.2 2,076.2 3,079.1
Growth (%) 24.7 44.7 23.6 5.3 48.3
Net Income (mn) 510.5 430.2 541.4 134.4 483.9
Growth (%) 193.6 -15.7 25.9 -55.2 260.0
Gross margin (%) 46.5 38.1 39.1 35.7 40.6
Profit margin (%) 19.7 11.5 11.7 6.5 15.7
ROE (%) 27.1 16.3 18.0 na na
ROA (%) 12.1 7.9 7.9 na na
EPS 0.5 0.4 0.5 na na
P/E (x) 32.71 43.85 34.81 na na
P/B (x) 7.68 6.69 5.90 na na
Dividend yield (%) 1.08 0.96 1.21 na na
EV/EBITDA (X) 8.3 4.9 6.4 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 25 of 35
China Pharmaceutical (中國製藥)
Price: HK$4.08 HKEx Code: 1093
Heavy contribution from intermediate and bulk drugs, unstable
margins
The company has 72% of 09 revenue contributed from intermediates and bulk drugs,
segments with high price volatility. Price volatility of these products can change
company operating margin from high double digits in first half to low single digit in
second half in same year.
Capacity leader in the industry which is cursed by
overcapacity.
The company is the largest 7-ACA manufacturer in PRC and the largest Vitamin
manufacturer in the world. The leading position in capacity does not bring more
bargaining power to the company; instead, it means high fixed cost and lower
margins.
The lower margins are unfortunately due to overcapacity of the company’s main
products. For instance, Vitamin C (~35% of 09 revenue of the company) has a world
demand of 100,000 ton/annual; production capacity in PRC is 180,000 ton/annual.
Similar situation happens on other products of the company.
Lack of growth catalysts in the near future
The company claims that they will sell more finished drugs in the future so that they
will rely less on intermediate and bulk drugs. However, at this stage, we do not see
any future products form the company which is attractive and can contribute
significantly to the company bottom line in short term.
We do not believe commodity business nature of the company will be changed in
short term and we think it is being traded at its fair value.
Not Rated
Key Data
Close price (HK$) 4.08
12 Months High (HK$) 6.26
12 Month Low (HK$) 3.83
3M Avg Dail Vol. (mn) 4.13
Issue Share (mn) 1,534.96
Market Cap (HK$mn) 6,262.64
Free Float % 48.96
Net cash/share (HK$) 0.33
Net debt/equity (%) 9.57
Fiscal Year 12/2009
Major shareholder (s) Legend Holdings Ltd (51.0%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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Company Background
The principal activities of the Group are the
manufacturing and sale of pharmaceutical products.
The “5-pillar” Analysis
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Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit H: Investment Summary
Year to Dec (HKD mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 4,986.1 6,830.0 7,031.6 3,502.9 3,941
Growth (%) 40.9 37.0 3.0 6.3 12.5
Net Income (mn) 477.4 940.6 970.7 532.7 426.2
Growth (%) 2,947.7 97.0 3.2 20 -20.0
Gross margin (%) 30.8 33.4 32.2 33.5 31.2
Profit margin (%) 9.6 13.8 13.8 15.2 10.8
ROE (%) 15.9 24.0 20.1 na na
ROA (%) 8.1 13.1 11.5 na na
EPS 0.3 0.6 0.6 na na
P/E (x) 13.14 6.67 6.45 na na
P/B (x) 1.87 1.39 1.21 na na
Dividend yield (%) 1.23 4.90 5.88 na na
EV/EBITDA (X) 5.3 2.8 4.3 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 26 of 35
Lijun International (利君國際)
Price: HK$2.71 HKEx Code: 2005
IVI is where the high growth lies in
Intravaneous Infusion (“IVI”, 靜脈輸液 ,打點滴 ) products. IVI products
manufactured in its Shijiazhuang plant (石家莊四葯) contributed for 40% of
revenues and 60% of profit in 2009.
In 2010, the Shijiazhung plant is the middle to expand its IVI capacity from 500mn
bottles/bags to 600mn bottles/bags. The company expects to expand capacity in IVI
products by 100mn bottles/bags every year until the capacity reaches 1bn
bottles/bags. We believe the IVI arm of Lijun to grow in a CAGR of >25% in future
three years.
Consolidation of IVI market is irreversible
IVI products can be classified into plastic and glass IVI products, while the market
trend is eliminating dated class products and moving towards plastic products.
Lijun has 70% of its capacity in plastic IVI products ranked #3 in the PRC IVI
market (6% market share in overall IVI market and 15% in plastic IVI products). In
the ongoing irriversible consolidations in PRC IVI market, Lijun is expected to be
benefited as one of the market leaders.
Comparing to other 2 leaders, Kelun (002422.SZ) and Shuanghe (600062.SH), we
believe Lijun has better economy of scale and quality control by concentrating all
IVI productions in one site. Therefore, we believe Lijun’s gap between its bigger
Not Rated
Key Data
Close price (HK$) 2.71
12 Months High (HK$) 3.30
12 Month Low (HK$) 0.80
3M Avg Dail Vol. (mn) 21.45
Issue Share (mn) 2,354.91
Market Cap (HK$mn) 6,381.79
Free Float % 27.51
Net cash/share (HK$) 0.14
Net debt/equity (%) 20.23
Fiscal Year 12/2009
Major shareholder (s) Prime United Ind (27.3%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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Company Background
The Group is principally engaged in the research,
development, manufacture and sale of a wide range
of pharmaceutical products, including antibiotics,
intravenous infusion solution, non-antibiotics
finished medicines, bulk pharmaceuticals and OTC
and healthcare products.
The “5-pillar” Analysis
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Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit J: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 1,110.9 1,420.1 1,533.2 866.3 988.8
Growth (%) 29.1 27.8 8.0 2.4 14.1
Net Income (mn) 116.5 91.1 190.4 112.2 140.3
Growth (%) 37.8 -21.8 109.0 -3.6 25.1
Gross margin (%) 50.8 45.7 49.4 48.8 51.6
Profit margin (%) 10.5 6.4 12.4 12.95 14.19
ROE (%) 14.1 8.0 14.4 na na
ROA (%) 8.0 4.5 8.6 na na
EPS 0.1 0.0 0.1 na na
P/E (x) 40.28 60.72 29.01 na na
P/B (x) 4.89 4.56 4.02 na na
Dividend yield (%) 0.58 0.53 1.30 na na
EV/EBITDA (X) 15.3 7.4 7.3 na na
Source: Bloomberg, OP Research
Exhibit I: China IVI product break-down (current and projected)
Plastictic IVI Product35%
Glass IVI Product 65%
Current
Plastictic IVI Product70%
Glass IVI Product 30%
2014
Source: Company, OP research
Oriental Patron Research
8 September 2010 Page 27 of 35
competetor is going to narrowed if not reversed.
Gradually growing old business: Antibiotics and chemical drugs.
Major products include Lijunsha (利君沙 , an antibiotic) which provides stable cash flow and
Paiqi (派奇, an antibiotic). We believe the sector should remain high single digit or low teen
growth before another significant new product is released. In FY09, both antibiotics and
chemical drugs contributed 56% of revenues.
Oriental Patron Research
8 September 2010 Page 28 of 35
Ruinian International (瑞年國際)
Price: HK$6.00 HKEx Code: 2010
High growth consumer stock?
The company mainly sells amino acid supplements (71%of revenue) and health
drinks (22% of revenue). While supplements are not drugs, they also need to be
approved by SFDA, but with less stringent procedures and is less time consuming.
Interim result is Not apple to apple, growth in 2011
questionable
While 1H10 revenue and profit grew yoy 132% and 325% respectively, they only
grew hoh 4% and 6%, due to the 2H skewed revenue and profit distribution in FY09
(1H09 revenue = RMB 263mn, 1H09 profit = RMB41mn; 2H09 revenue = RMB
587mn, 2H09 profit = RMB168mn).
If 2H10 and FY11 repeat a single digit hoh growth similar to that of 1H10, company
will be unable to achieve the Bloomberg consensus CAGR of 38% (FY10-FY12),
we believe.
In the shadow of divestments
Investors are scattered while multiple funds holding about 34% of outstanding
shares with the lowest entry costs ranging from HK$1.36/share to HK$2.70/share.
While the stock is currently trading at HK$5.97/share, we think the selling pressure
is high.
Not Rated
Key Data
Close price (HK$) 6.00
12 Months High (HK$) 6.64
12 Month Low (HK$) 2.75
3M Avg Dail Vol. (mn) 12.71
Issue Share (mn) 1,046.59
Market Cap (HK$mn) 6,279.52
Free Float % 47.80
Net cash/share (HK$)
Net debt/equity (%) 1.36
Fiscal Year 12/2009
Major shareholder (s) Wang Fucai (38.2%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
Price Chart
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Company Background
The principal activities of the Group are engaged in
the manufacturing and sales of amino acid-based
nutritional supplement, general health products,
health drinks and pharmaceutical products.
The “5-pillar” Analysis
4
3
3
04
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
* analysis on policy effect of this company is not
appropriate
Exhibit L: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 405.5 632.4 850.6 263.9 612.8
Growth (%) 106.1 55.9 34.5 n/a 132.2
Net Income (mn) 135.2 120.0 209.7 41.8 177.6
Growth (%) 451.5 -11.3 74.8 n/a 325.1
Gross margin (%) 78.6 67.4 69.2 60.05 73.43
Profit margin (%) 33.3 19.0 24.7 15.83 28.98
ROE (%) 55.7 25.9 29.8 na na
ROA (%) 16.9 14.1 19.6 na na
EPS 0.3 0.2 0.3 na na
P/E (x) 22.64 37.50 21.43 na na
P/B (x) na na na na na
Dividend yield (%) na na na na na
EV/EBITDA (X) na na na na na
Source: Bloomberg, OP Research
Exhibit K: Selected investors and their status
Name of selected investors Holding share count/
% of outstanding
Investment cost
of shares
Status
Tetrad(Government of
Singapore Investments)
68.5mn shares/6.55% HK$2.4 All shares sold at price
HK$5.71 on 24/8/2010
Templeton 50.3mn/4.80% HK$2.32 Selling pressure exists
Raffles 54.7mn/5.23% HK$1.36 Selling pressure exists
Turrence (CK life Science) 93.2mn/8.91% HK$1.36 Selling pressure exists
CCBI 14.4mn/1.44% HK$2.70 Selling pressure exists
HSBC Holdings 45.0mn/4.30% N/A NA
Harvest Fund 48.5mn/4.63% N/A NA
JP Morgan Chase &Co 45.8mn/4.37% N/A NA
Source: company prospectus, Bloomberg
Oriental Patron Research
8 September 2010 Page 29 of 35
Shandong Weigao (山東威高)
Price: HK$21.40 HKEx Code: 1066
True domestic leader in medical device
The company produces and sells 1) Consumables (overall: 15% market share;
infusion sets (40%market share), syringes(20% market share) and blood bags(50%
market shares), 2) Blood purification filters (6% market share), 3) Orthopedic
products (4% market share)and 4)Stents(25% market share).
While none of domestic medical device companies can compare to Weigao on
product variety, we believe the company should further reinforce its leadership roles.
The big trend of domestic brands taking over
Indeed, many domestic producers have been selling OEM products to their
international competitors for years showing that many domestic products have
reached similar technology and quality level in some products comparing to their
foreign counterparts, although they are selling at a significantly lower price. In the
long run, we believe domestic devices are going to further acquire market shares of
foreign brands.
This trend is shown in the stent segment: currently, 75% of market share is acquired
by domestic players; back in 2006 over 90% market share was occupied by
international players.
A sustainable high growth
The company will benefit from volume growth in absolute term driven by the
demand of medical reform. While most of the company’s revenues are from high
end hospitals, medical reform triggers demands in rural areas. We estimate, within
the RMB850bn extra fiscal spending for medical reform, about 1/5 will be used to
acquire medical devices and for building rural area medical facilities.
We think the company should continue to be the leader in the sub-sector.
Considering its sustainable high growth potential in the future, we established our
long view to the company.
Not Rated
Key Data
Close price (HK$) 21.40
12 Months High (HK$) 23.20
12 Month Low (HK$) 10.90
3M Avg Dail Vol. (mn) 1.30
Issue Share (mn) 856.24
Market Cap (HK$mn) 32,194.21
Free Float % 81.15
Net cash/share (HK$) (0.14)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Weigao Holding (49.5%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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Company Background
The Group is principally engaged in the research
and development, production and sale of single-sue
medical devices.
The “5-pillar” Analysis
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Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit M: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 1,095.1 1,514.4 1,878.5 874.1 1,137.6
Growth (%) 39.2 38.3 24.0 n/a 30.1
Net Income (mn) 308.1 482.4 633.9 257.6 335.5
Growth (%) 80.3 56.5 31.4 n/a 30.2
Gross margin (%) 45.7 50.1 53.3 49.2 52.7
Profit margin (%) 28.1 31.9 33.7 29.5 29.5
ROE (%) 30.4 25.4 23.4 na na
ROA (%) 17.4 17.6 17.4 na na
EPS 0.2 0.2 0.3 na na
P/E (x) 138.06 89.17 72.54 na na
P/B (x) 32.09 18.60 15.67 na na
Dividend yield (%) 0.22 0.34 0.41 na na
EV/EBITDA (X) 50.4 20.2 39.4 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 30 of 35
Shineway Pharmaceutical (中國神威藥業)
Price: HK$21.60 HKEx Code: 2877
Mass market focused, impressive margin
The company offers a range of prescription and OTC modern Chinese medicines.
The spectrum of products focus on the treatment of common illness of mid to old
aged patients and children, such as cardiovascular disease, respiratory system
sickness, cold and fever and digestive system diseases.
The company’s 30 products are included in the latest Essential Drug List(基本藥物) while most of its products are included in the National Medical Insurance
Reimbursement List (國家醫保). While most of its products are selling at a discount
to competitors and focus on mass market, the company has maintained an
impressive >70% gross margin for over three years.
High margin might not be sustainable.
The fact that most of its products are non-exclusive made us suspect if the company
can sustain such a high margin while other competitors drag it into price war. For
most of its products in EDL, future overcapacities are possible if other competitors
decide to expand production lines like Shinway did.
On the other hand, If the government really decides to regulate companies by gross
margins and operating margins, the company (with a gross margin over 70%) is
more affected comparing to other not as profitable peers.
Not Rated
Key Data
Close price (HK$) 21.60
12 Months High (HK$) 28.25
12 Month Low (HK$) 7.45
3M Avg Dail Vol. (mn) 3.15
Issue Share (mn) 827.00
Market Cap (HK$mn) 17,863.20
Free Float % 42.40
Net cash/share (HK$) (2.70)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Forway Inv.Ltd. (57.6%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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%2877 HK MSCI CHINA
Company Background
The Group is principally engaged in research and
development, production and sales of modern
Chinese medicines mainly in injections, soft
capsules and granules formats.
The “5-pillar” Analysis
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3
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Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit N: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 1,012.9 1,275.2 1,633.2 707.8 925.4
Growth (%) 20.4 25.9 28.1 10.2 30.7
Net Income (mn) 490.6 398.2 767.3 401.3 420.7
Growth (%) 47.3 -18.8 92.7 49.5 4.8
Gross margin (%) 72.9 71.7 72.1 70.5 69.5
Profit margin (%) 48.4 31.2 47.0 56.7 45.5
ROE (%) 25.6 18.9 31.6 na na
ROA (%) 22.2 16.5 26.9 na na
EPS 0.6 0.5 0.9 na na
P/E (x) 36.61 45.00 23.23 na na
P/B (x) 8.63 8.36 6.56 na na
Dividend yield (%) 1.02 1.11 1.02 na na
EV/EBITDA (X) 5.9 2.6 11.0 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 31 of 35
Sino Biopharmaceutical (中國生物製藥)
Price: HK$2.93 HKEx Code: 1177
Balanced product spectrum, with growing demands
The company sells and develops drugs for hepatitis (肝炎, 48% of 09 revenue), cardio-cerebral disease (心腦病, 19% of 09 revenue), oncology (癌症, 6% of 09 revenue), respiratory system disease (呼吸系統疾病), analgesic (止痛) and diabetics (糖尿病).
The company has 148 products in the National Medical Insurance Reimbursement List (NMIRL, 國家醫保目錄). While 5 new entries (Mingzheng, Ganmei, Kaifen, Runzhong, and Fenghaineng Fructose) happened in the 2009 NMIRL, we believe volume growth from these items should be shown in the coming 2-3 years.
Multiple products are members of the “Hundred Million Club”
For many Chinese drug companies, selling a product with revenue of RMB100mn makes the product a blockbuster; Sino Biopharm has many of these block-busters.
Sustainable growth, driven by innovation
Overall, we estimate that its growth in 2010 to be about 25% yoy, thanks to the volume growth of multiple products. In the coming 2-3 years, the company will remain a high growth rate ~25%, which is above the subsector average of ~20%.
In the long run, the company focuses on R&D (09 R&D expense is over 5% of revenue). We believe that the company is one of the most innovative pharmaceutical companies in PRC and we respect its ability to deliver new products. In 2009, the company achieved 3 new product approvals, 1 import registration approval, 16 production approvals and 6 clinical research approvals. We believe the company will constantly roll out new products for growth.
Not Rated
Key Data
Close price (HK$) 2.93
12 Months High (HK$) 4.04
12 Month Low (HK$) 1.07
3M Avg Dail Vol. (mn) 26.03
Issue Share (mn) 4,956.65
Market Cap (HK$mn) 14,522.97
Free Float % 45.24
Net cash/share (HK$) (0.42)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) Tse Ping (42.6%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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Company Background
The principal activities of the Group are engaged in
the research, development, manufacturing and
marketing a vast array of biopharmaceuticals,
modernized Chinese medicines and chemical
medicines.
The “5-pillar” Analysis
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5
44
3
Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
Exhibit P: Investment Summary
Year to Dec (HKD mn) FY07A FY08A FY09A 1H09A 1H10A
Revenue (mn) 1,164.3 2,282.2 3,243.6 1572.4 1928.3
Growth (%) 58.5 96.0 42.1 49.4 22.6
Net Income (mn) 224.4 297.6 397.0 176.3 192.4
Growth (%) 58.9 32.7 33.4 31.4 9.1
Gross margin (%) 82.3 79.3 80.3 78.1 79.4
Profit margin (%) 19.3 13.0 12.2 11.2 10.0
ROE (%) 11.4 14.0 16.9 na na
ROA (%) 9.4 10.2 11.3 na na
EPS 0.0 0.1 0.1 na na
P/E (x) 59.13 44.56 33.41 na na
P/B (x) 6.57 5.95 5.36 na na
Dividend yield (%) 1.02 1.02 2.22 na na
EV/EBITDA (X) 6.3 1.7 11.6 na na
Source: Bloomberg, OP Research
Exhibit O: Major products of Sino Biopharm
Product name 09 sales/ % of 09 total sales Function
Kaishi injection RMB760mn/ 25% cardio-cerebral drug
Mingzheng Capsules RMB634mn//20% hepatitis
Tianqingganmei RMB333mn/10% hepatitis
Ganlixin RMB239mn/ hepatitis
Kaifen RMB191mn analgesic
Taianqingganping RMB183mn hepatitis
Tianqingfuxin RMB111mn hepatitis
Tianqingganning RMB103mn cardio-cerebral
Source: Company, OP Research
Oriental Patron Research
8 September 2010 Page 32 of 35
Sinopharm (國藥控股)
Price: HK$31.45 HKEx Code: 1099
The biggest drug distributor in PRC
It is currently the biggest distributor (~12% market share) in the nation, with 25
distribution centers, covering 19 provinces and religions in PRC, covering over
4,700 major hospitals and over 24,000 other institutional customers, including
pharmaceutical distributors, retail pharmacies, and other healthcare institutions.
Benefited from consolidation
In the subsector, second biggest distributor only has a market share about 5% and
the top 5 players only accounts for ~25%; industrial concentration is low. We believe
consolidations in the sector are irreversible and the pace will only get faster. Without
the economies of scale and established network, smaller players will be eliminated
or acquired by bigger players like Sinopharm.
On the policy side, the government expressed their will to limit 1) distributor
numbers and 2) price add-on from door of drug companies to door of hospitals. Also,
we believe “the Twelfth Five-year Plan” will further mention its support to
consolidations of the drug distribution sub-sector. The Ministry of Commerce has
expressed about their future plan to develop 2-3 “national leaders” (with over
RMB100bn revenue) and about 20 “regional leaders” (with over RMB10bn revenue)
in the drug distribution sub-sector, eliminating other smaller inefficient players.
OTC retail business, not so attractive now but with high
potential
By May FY09, the company has 632 owned retail pharmacies and 186 franchise
units. While the segment faces fierce competition and only contributed 1% of the
FY09 EBIT. We believe the segmental profitability will be improved in future while
its distribution network continuously provides synergy to the retail arm.
Trading at a premium, but a “must have” for many investors
The company has been trading at a premium (FY11 PE at 35X while the peer
average is <20). We believe this premium is going to continue given 1) its proxy
nature to the PRC pharmaceutical sector and 2) investors’ popularity on quality big
caps in the PRC healthcare sector.
Not Rated
Key Data
Close price (HK$) 31.45
12 Months High (HK$) 38.60
12 Month Low (HK$) 16.00
3M Avg Dail Vol. (mn) 4.89
Issue Share (mn) 690.28
Market Cap (HK$mn) 71,220.68
Free Float % 90.91
Net cash/share (HK$) (0.57)
Net debt/equity (%) Net Cash
Fiscal Year 12/2009
Major shareholder (s) CNPGC (69.5%)
Source: Company data, Bloomberg, OP Research Closing price are as of 7/9/2010 All figures are subject to rounding
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Company Background
The principal activities of the Group are engaged in
the distribution of medicine and pharmaceutical
products to wholesale customers, including
hospitals and distributors; operation of medicine
chain stores; and distribution of laboratory supplies,
manufacturing and distribution of chemical reagents
and production and sale of pharmaceutical.
The “5-pillar” Analysis
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Profitability
Technology/ Innovation
Growth Potential
Policy Benefit
Valuation Attractiveness
* analysis on tech of this company is not appropriate
Exhibit Q: Investment Summary
Year to Dec (RMB mn) FY07A FY08A FY09A 1H09 1H10
Revenue (mn) 31,110.2 38,191.9 47,045.9 23,294.3 31,567.5
Growth (%) 31.1 22.8 23.2 20.4 35.5
Net Income (mn) 380.9 587.6 845.8 494.3 628.6
Growth (%) 275.9 54.3 43.9 44.6 27.2
Gross margin (%) 8.2 8.0 8.0 8.0 8.2
Profit margin (%) 1.2 1.5 1.8 2.1 2.0
ROE (%) 22.1 29.7 12.8 na na
ROA (%) 2.9 3.9 3.8 na na
EPS 0.2 0.4 0.5 na na
P/E (x) 136.74 87.36 66.91 na na
P/B (x) na 22.71 6.53 na na
Dividend yield (%) na na 0.03 na na
EV/EBITDA (X) na na 31.5 na na
Source: Bloomberg, OP Research
Oriental Patron Research
8 September 2010 Page 33 of 35
Exhibit R: Peer Group Comparison
Bloomberg Year Mkt Cap Local Price YTD 1D 5D PER (x) Yield (%) P/B (x)
code Currency End (mil) 7/9/10 (%) (%) (%) FY09A FY10E FY11E FY09A FY10E FY11E FY09A FY10E FY11E
Medical Sector
SINO BIOPHARM 1177 HK HKD 12/2009 14,523 2.93 19.1 (1.7) 11.0 44.6 29.0 23.3 1.0 1.7 2.0 6.0 3.8 3.4
SHANDONG WEIG-H 1066 HK CNY 12/2009 32,194 21.40 65.3 2.1 10.3 79.6 48.2 35.4 0.3 0.4 0.6 16.4 10.8 8.6
LIJUN INTL PHARM 2005 HK CNY 12/2009 6,382 2.71 116.8 (0.4) 14.8 54.2 22.0 17.8 0.5 1.4 1.7 4.0 2.9 2.6
LEE'S PHARM 950 HK HKD 12/2009 1,356 3.01 79.2 0.7 16.2 44.5 18.8 13.7 0.5 1.3 1.9 14.6 6.8 4.9
SINOPHARM-H 1099 HK CNY 12/2009 71,221 31.45 14.2 0.3 6.1 77.9 48.5 36.2 - 0.5 0.7 20.0 5.4 4.8
MINGYUAN MEDICA 233 HK HKD 12/2009 3,396 0.91 (31.6) 5.8 15.2 17.7 16.5 13.6 - 1.3 1.4 2.6 1.9 1.7
TRAUSON HOLDINGS 325 HK CNY 12/2009 2,780 3.59 na 2.0 2.0 26.7 22.4 18.4 - 1.2 1.5 N/A 2.7 2.5
LANSEN PHARMACEU 503 HK USD 12/2009 1,444 3.48 na 0.6 11.5 N/A 20.4 14.6 - N/A N/A N/A N/A N/A
CHINA SHINEWAY 2877 HK CNY 12/2009 17,863 21.60 49.5 2.1 5.9 40.2 19.3 15.5 1.1 1.9 2.4 7.4 5.0 4.3
GUANGZHOU PHAR-H 874 HK CNY 12/2009 10,707 8.05 37.6 - 16.2 32.1 19.8 16.0 0.5 0.7 1.0 1.8 1.6 1.5
Average 44 1 11 46 27 20 0 1 1 9 5 4
Median 44 1 11 44 21 17 0 1 1 7 4 3
Source: Bloomberg
Oriental Patron Research
8 September 2010 Page 34 of 35
Exhibit S: The “5-pillar” Analysis key
Source: OP research.
Oriental Patron Research – Equities
8 September 2010 Page 35 of 35
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