Wednesday, April 20, 2016
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
Sinco Pharma (6833 HK) Milo Liu Hayden Zhang (852) 3189 6711 (852) 3189 6754 Emerging MPCM contender in the booming plasma industry [email protected] [email protected] rd 3 largest MPCM provider in China. Sinco Pharmaceutical Holdings Ltd (“Sinco” Initiation of Coverage or the “company”) is one of the largest Marketing, Promotion and Channel
Management (MPCM) provider in China with a market share of 6.4% in terms of revenue in 2014. Sinco is also the sole MPCM provider offering imported plasma- BUY based product from abroad, currently the 4th largest human albumin provider in Previous N/A terms of revenue in China in 2014. The company has grown rapidly via new products introduction and currently becoming a meaningful MPCM contender in China. Sinco Price HK$0.7 generates profit by purchasing products from suppliers and on-selling to distributors 12-month Target Price across China. Under this business model, Sinco books its sales to distributors as HK$1.08 (+54%) (Potential upside) revenue while taking the COGS as purchasing prices from the suppliers. Unique presence in the plasma industry: Plasma industry is currently one of the Previous N/A fastest-growing and most defensive sub-sector among China’s pharmaceutical industry. This is mainly attributable to: 1) irreplaceable nature in emergency; 2) Price Performance significant unmet demand; 3) favourable while highly regulated government (%) 20 6833 HSI Index initiatives; and 4) technological improvements in the manufacturing process. Much better SG&A management: Sinco currently operates on an asset-light 10 model which is different from its peers that are on asset-heavy model with internal 0 marketing teams. One major advantage of this business model is that it offers more flexibility and effectiveness when it comes to marketing and promotion, which -10 greatly boosts efficiency to the company with significantly better SG&A -20 management compared with others. Mar/16
New products provide inorganic growth and synergies: Octapharma mainly Source: Bigdata focuses on recombinant coagulation factor VIII (Factor VIII), which is another % 1m 6m 12m product that is allowed to be imported from overseas. Together with its existing 6833 HK (13.9) (15.0) (15.0) product line, Sinco is likely to enjoy synergy effect from its increased economies of HSI 2.4 (8.3) (23.5) scale in the future, in our view. Superior growth over its peers: Sinco has grown fast in recent years with revenue Industry: Healthcare CAGR of 247% and adjusted net profit CAGR of 572% during FY12-15, the highest Hang Seng Index 21,436 among its peers, partly due to its smaller base effect. We expect 29%/29%/22% HSCEI 9,244 revenue growth in FY16E-18E, mainly driven by the volume ramp-up among its Key Data major products. Adjusted net profit is expected to be RMB140mn/191mn/245mn (at 52-week range (HK$) 0.66-1.02 a CAGR of 32%) during the period, which is driven by fast top-line growth, better Market cap (HK$ mn) 1,131 margins and efficiencies down the road. Avg. daily volume (mn) 3.7 BVPS (HK$) FY15 0.3 Valuation: Our target price of HK$1.08 is derived from the average of the two Shareholdings Structure valuation methods (DCF: HK$1.11 and P/E: HK$1.05), which implies FY16E P/E of Huang Xiangbin 65.0% 10.6x. Sinco is current trading at 6.8x FY16E P/E which we believe is attractive Liu Sichuan 5.6% compared to its counterparts at north of 9x. Prestigious Leader Ltd 3.9% Risks: 1) concentration risk; 2) currency risk; 3) bargaining power with suppliers Free float 22.6% might diminish over time; 4) licensing risk; and 5) limited operating history. Related Research Financials N/A RMB mn 2013A 2014A 2015A 2016E 2017E 2018E
Revenue 532.5 950.1 1,096.1 1,410.1 1,816.0 2,219.3 Growth (%) 1935.0% 78.4% 15.4% 28.7% 28.8% 22.2% Adjusted Net profit 43.0 80.1 83.6 139.9 191.0 245.3 Growth (%) 15475.0% 86.4% 4.4% 67.3% 36.5% 28.4% ROE (%) 88.9% 64.9% 35.9% 19.4% 25.9% 24.9% ROA (%) 11.4% 18.2% 15.0% 14.5% 19.8% 20.3% P/E (x) 16.6 8.9 8.5 6.8 5.0 3.9 P/B (x) 14.7 5.8 3.7 1.8 1.3 1.0 Sources: Company, CMS (HK) estimates
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
Wednesday, April 20, 2016
Investment Summary
Serious MPCM contender with unique presence in the booming plasma industry Being the 3rd largest MPCM provider in China’s pharmaceutical market in terms of revenue in 2014, Sinco is comfortably riding on the fast growing MPCM industry in China, which is expected to grow at a CAGR of c.25% from 2015 to 2019, according to Frost & Sullivan report. The company is also the sole MPCM provider offers imported plasma-based product from abroad, surpassing other domestic plasma manufactures such as China Biologic Products (CBPO US) and Shanghai RAAS (002252 CH) to become the 4th largest human albumin provider with 7.3% market share in terms of revenue in China in 2014.
Well positioned to lock in favourable terms with its suppliers Sinco focuses on small/medium-sized overseas suppliers which are not be able to establish their on the ground in- house marketing, promotion and sales in China. Since they are highly dependent on MPCMs such as Sinco, the company could easily secure longer contractual period and exclusive right to promote and sell some of the core products from its suppliers, in our view. Sinco is currently the sole service provider for Octapharma to promote human albumin product in 24 provinces in China, and contribute over 75% of Octapharma’s sales of its human albumin product in China in 2014.
Factor VIII could potentially be the game changer Factor VIII has great market potential as it is currently extremely under-supplied and only been used for urgent medical treatment for patients with hemophilia in China, while the product is widely used to improve vitality and lifespans in U.S. and other mature markets. Octapharma reached a major milestone in 2014 that entered into the recombinant market when Nuwiq became the first recombinant factor VIII from a human cell line to be approved in Europe. We expect this to be the game changer for Sinco if the company could leverage the relationship to tap into this nascent market in the future.
Relationship with Kelun Long-term collaboration with leading and reputable pharmaceutical companies allows Sinco to leverage big companies’ (such as Kelun Pharmaceuticals and Guangzhou Pharmaceuticals) platform advantage to further develop business and distribution network; improve its inventory management; benefit the company with sustainable long- term growth prospects; and gradually gain reputation within the industry to draw more market shares from the peers.
Superior growth over its peers The exponential growth of Sinco in recent years was mainly due to the much smaller scale compared with its peers. We expect 29%/29%/22% revenue growth in FY16E-18E, mainly driven by the volume ramp-up among its major products. Adjusted net profit (adj. for the listing expense) of RMB140mn/191mn/245mn (at a CAGR of 32%) is driven by 1) fast top-line growth; 2) better margin as a result of better product mix and potential ASP increase in human albumin product; 3) improve in efficiency owing to its asset-light business model as well as internal synergy; and 4) lower tax rate.
Limited ASP erosions from the tendering Except the human albumin products that are subject to price increase, we expect stable ASP for company’s other products in the upcoming years as we believe the drugs are relatively more defensive to the price erosion from the tendering, thanks to the low price strategy by the management that the current selling price is well below the tendering price, poised for better penetration in the new markets.
Valuation Valuation of the stock is attractive compared to its peers, dispite slightly different business approach among each companies. Recent market sentiment towards the healthcare industry is relatively weak, but we believe Sinco possessed a great opportunity for the future re-rating, if the company is gradually building its credibility and track record down the road. To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Focus Charts Figure 1: Business model Figure 2: Market share of MPCMs in China (2014)
Sinco Pharma Manufacturers Hospital level China Medical 6.4% System 19.7% product information Pioneer Pharma Sinco Pharma 10.3%
Physicians Eddingpharm generate demand 5.3%
clinical promotions NT Pharma Distributors, 5.8% Sub-Distributors fulfill demand Hospital Others 52.5% Information Patients Products Source: Company, CMS (HK) Source: Frost & Sullivan report, CMS (HK)
Figure 3: Total sales breakdown (RMB mn) Figure 4: Margin trend and forecasts Human Albumin Axetine Mercedof Taurolite 20% Gross Margin Adj. Operating Margin Adj. Net Margin TAD Esafosfina Q10 2,500 18% 16.5% 15.3% 16% 15.0% 13.9% 13.7% 13.4% 2,000 14% 12.1% 11.5% 11.1% 12% 10.6% 9.7% 1,500 9.2% 10% 11.1% 10.5% 9.9% 8% 8.1% 1,000 8.4% 6% 7.6%
500 4% 2%
0 0% 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
Figure 5: Annual sales trend of human albumin in class Figure 6: Demand and supply trend of human II and above hospitals in China (RMB mn) albumin in China
Total Demand Total Supply Supply as % of Demand 2012A 2013A 2014A 30,000 140% 2,000 115% 1,800 25,000 108% 120% 100% 1,600 94% 87% 100% 1,400 20,000 81%
1,200 80% 15,000 1,000 60% 800 10,000 40% 600
400 5,000 20% 200 0 0% 0 CSL Behring Grifols Baxter CBPO Hualan Bio
Source: IMS database, CMS (HK) Source: National Health & Family Planning Commission (NHFPC), CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Contents Investment Summary ...... 2 Focus Charts...... 3 Investment Risks...... 5 Valuation ...... 6 1. DCF Valuation 7 2. P/E Valuation 8 Financial Analysis and Forecasts ...... 10 Income Statement 10 Balance Sheet & Cash Flow 17 Sensitivity Analysis 18 Financial Models 21 Company Profile ...... 25 Company Overview 25 Products 27 Suppliers – Case Study of Octapharma 39 Customer – Case Study of Sichuan Kelun Pharmaceuticals Trading Ltd 41 Industry Overview ...... 42 Marketing, Promotion and Channel Management (MPCM) Services Industry 42 Market of Plasma-based Products 45 Supply and Demand of Human Albumin Product in China 48 Market of Other Selective Therapeutic Areas 49 Peers Comparison ...... 51 China Medical System (867 HK) 52 China Biologic Products (CBPO US) 54 Huadong Medicine (000963 CH) 56 Pacific Biopharmaceutical (Pacific Bio) 58 Appendix ...... 59 Investment Ratings ...... 63
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Investment Risks Bargaining power with suppliers might diminish over time, which potentially results in lower growth and higher selling costs. Bargaining power includes pricing power with its suppliers as well as capabilities in sourcing additional or new products. The potential diminishing bargaining power over its suppliers may be driven by: 1) overseas manufacturers to tap into fast growing Chinese market by establishing their own in-house marketing teams; and 2) severe competition from similar service providers. This could lead to less reliance on Sinco, which may result in lower revenue growth as well as increase in selling costs over time.
Policy headwinds. Sinco is greatly affected by the government policy change towards the healthcare industry. Besides the limitation on the antibiotics business, company generates c.61% of its total revenue from human albumin products in FY15. Policy changes towards the plasma industry include: limitation on certain plasma products from importing; ban or limit plasma products; and roll-out stricter cold-chain storage requirements.
Potential margin shrink from the price erosion. The market for plasma-based pharmaceuticals is strictly regulated and subject to change by government policies, which could result in more difficulties or higher costs down the road. In addition, the pricing of other imported products in the portfolio has been under pressure and it is expected to partially pass to MPCM providers such as Sinco. Price erosions arising from change in regulations may adversely affect margins.
Concentration risk on suppliers, customers and products. All 7 products from the portfolio are sourced from 5 suppliers, and Sinco also highly relies on its key distributors as c.37.5% of the revenue were generated from the top 2 customers in FY15. Although we are not expecting contract renewal risk with the suppliers in the near term, given most product contracts expire in mid-2020’s or before, there is still possibility that the company may fail to maintain relationships with major suppliers/customers; experience prolonged delays or significant disruptions to the supply of products; increase in the purchase prices or lose exclusive distribution rights in the future. Additionally, human albumin remains the major profit driver with c.61% revenue contribution to the company in FY15. The company future growth would be challenging if operation in human albumin product lessened or ceased.
Future growth potential of antibiotics is still clouded with uncertainties. The Government rolled out stringent policy on the use of antibiotics few years ago, and we saw the impact has already begun to surface as the market size of both cefuroxime sodium and cefoperazone sodium shrunk in 2014, according to Frost & Sullivan report. Although it is difficult to gauge the potential impact to the existing antibiotics products of Sinco, the future growth prospect is still clouded with uncertainties, in our view.
Licensing risk. Sinco may greatly affected by the self-inspection and clinical data verification process when renewing or introducing new products. We noted that CFDA has required such verification data of TAD when renewing its license in 2H15, which greatly affected its volume growth during the period. The future growth would be negatively affected if the verification data cannot meet the government standard, and subsequently, the company might lose the right to service the products if Sinco fails to complete registration or renewal within a specified timeframe.
Uncertainties regarding the new products. New product introduction through M&A or in-licensing serves as an important part of future growth strategy to the company. In addition to expanding its product portfolio to include more imported plasma-based products, Sinco intends to focus on overseas pharmaceutical products which sit in the fast- growing therapeutic areas to achieve operational synergies. The future growth would be questioned if Sinco is unable to source/add new products to the portfolio.
Currency risk. Sinco is exposed to foreign exchange risk as products purchased from suppliers are mostly settled in USD and EUR while domestic transactions are denominated in RMB. In addition, certain trade credits are also denominated in USD. Unfavorable future currency fluctuation may result in foreign exchange loss to the company, as Sinco has yet to contemplate any currency hedging solutions thus far.
Limited operating history. Sinco Pharmaceuticals was founded in 2011 with 5 years of operating history. The explosive growth in the past few years was largely due to small scale at the beginning and the historical results are not indicative to the future growth prospects.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Valuation
We use two methods for valuation purpose, namely, DCF and P/E:
While we believe DCF may capture the long-term prospects of the company, the P/E method may reflect the current investor sentiment better.
Our TP of HK$1.08 is derived from the average of the two methods (DCF: HK$1.11 and P/E: HK$1.05), which implies FY16E P/E of 10.6x.
Figure 1: Our TP of HK$1.08 is derived from averaging of two methods (DCF and P/E) Low end Mid point High end DCF Parameters WACC 12.3%, Terminal rate 1% WACC 11.3%, Terminal rate 2% WACC 10.3%, Terminal rate 3% DCF implied value (RMB '000) 1,403,169 1,514,205 1,651,405 DCF implied share price (HK$) 1.03 1.11 1.21 Implied 2016E P/E 10.0x 10.8x 11.8x
PE Average of HK listed China heatlhcare Parameters (2016E) Adj. Hong Kong listed peers Hong Kong listed peers Avg. onshore/offshore peers P/E implied value (RMB '000) 1,442,966 1,803,707 2,093,795 P/E implied share price (HK$) 1.05 1.32 1.53 2016E P/E 10.3x 12.9x 15.0x Source: CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
1. DCF Valuation
Our DCF-based valuation shows an implied share price of HK$1.1, which corresponds to 2016E P/E of 10.8x. The key assumptions are as follows:
1) We set risk free rate at 3.0%. 2) We assume equity risk premium at 11.00% and beta of 1.0 and adjusted industry risk premium of 2%. As a result, the company’s cost of equity is 16.0%. 3) Assuming Sinco borrows at 7% interest rate level and its effective tax rate to be 15.0%, we estimate the weighted average cost of capital (WACC) to be equal to 13.0%. 4) We set the terminal growth rate at 2%.
Figure 2: DCF analysis COE WACC 12.0% 12.0% 12.0% 13.0% 13.0% 13.0% 14.0% 14.0% 14.0% Risk Free rate 3.00% Perpetuity 1% 2% 3% 1% 2% 3% 1% 2% 3% Beta 1 2016E-2025E ¥1,166,020 ¥1,166,020 ¥1,166,020 ¥1,112,371 ¥1,112,371 ¥1,112,371 ¥1,062,130 ¥1,062,130 ¥1,062,130 Equity Risk premium 11.00% 2026E-2030E ¥362,876 ¥362,876 ¥362,876 ¥324,661 ¥324,661 ¥324,661 ¥290,800 ¥290,800 ¥290,800 Adjusted industry risk premium 2% Terminal ¥99,255 ¥109,779 ¥122,516 ¥70,312 ¥77,181 ¥85,356 ¥50,245 ¥54,801 ¥60,149 COE 16.0% NAV (RMB'000) ¥1,628,151 ¥1,638,675 ¥1,651,412 ¥1,507,344 ¥1,514,212 ¥1,522,387 ¥1,403,175 ¥1,407,731 ¥1,413,079 Share count ('000) 1,615,220 1,615,220 1,615,220 1,615,220 1,615,220 1,615,220 1,615,220 1,615,220 1,615,220 WACC NAV/share ¥1.01 ¥1.01 ¥1.02 ¥0.93 ¥0.94 ¥0.94 ¥0.87 ¥0.87 ¥0.87 WACC = Re x E/V + Rd x (1-corporate tax rate) x D/V 1.18 HKD/RMB $1.19 $1.20 $1.21 $1.10 $1.11 $1.11 $1.03 $1.03 $1.03 Re 16.0% E 193,554 D 81,915 V 275,469 Rd 7% Tc 15% WACC 13.0% Source: CMS (HK) estimates
We use our sensitivity analysis to determine the high end (RMB1,651mn, implying FY16E P/E of 11.8x), the mid point (RMB1,514mn, implying P/E of 10.8x) and the low end (RMB1,403mn, implying P/E of 10.0x). Parameters include WACC (12.0%/13.0%/14.0%) and terminal rate (1%/2%/3%).
Figure 3: DCF sensitivity analysis Terminal rate WACC 1% 2% 3% 12.0% ¥1,628,151 ¥1,638,675 ¥1,651,412 13.0% ¥1,507,344 ¥1,514,212 ¥1,522,388 14.0% ¥1,403,175 ¥1,407,731 ¥1,413,079
Terminal rate WACC 1% 2% 3% 12.0% 11.6x 11.7x 11.8x 13.0% 10.8x 10.8x 10.9x 14.0% 10.0x 10.1x 10.1x Source: CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
2. P/E Valuation
We use two sets of comparables: 1) A-share listed peers and 2) Hong Kong listed China healthcare companies as our peers comparisons.
We derive our high end of the P/E method by using average of adjusted A-share listed peers and Hong Kong listed China healthcare peers, which gives us 15.0x 2016E P/E. We applied 26% discount to calculate the adjusted A-share listed peers, based on the A-share premium of Shanghai Pharma (2607 HK) over its current H-share valuation.
Our mid point is determined by the current Hong Kong listed China healthcare valuation, which is 12.9x 2016E P/E.
Our low end is derived from a 20% discount to the current Hong Kong listed China healthcare valuation, which imples 10.3x 2016E P/E. We apply 20% discount as we take into consideration of: 1) relatively smaller scale of the company; and 2) limited operating history.
We deployed our low end as our P/E valuation. This is mainly due to investors may not want to give Sinco Pharma full credit as the company is still building its track record after its IPO.
Figure 4: P/E valuation 2016E P/E A-share listed peers 21.4x Hong Kong listed China healthcare 12.9x Average 17.2x
Adjusting A-share listed Shanghai Pharma by P/E 601607-CN SHANG PHARM -A 13.3x 2607-HK SHANGHAI PHARM-H 10.6x A-share premium over H-share 26%
2016E P/E Adjusted A-share listed peers 17.0x Hong Kong listed China healthcare 12.9x Average 15.0x
RMB '000 Sinco '16E net income P/E Implied value High end 139,905 15.0x 2,093,795 Mid point 139,905 12.9x 1,803,707 Low end 139,905 10.3x 1,442,966 Source: CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 5: Comparison table Name 中文名 Ticker Mkt Cap Currency –––––––––P/E–––––––––EPS CAGR –––––––––PEG––––––––– –––––––––P/B––––––––– –––––––––ROE–––––––– ––––––––EPS–––––––– (HK$mn) 15A 16E 17E 15A-17E 15A 16E 17E 15A 16E 17E 15A 16E 17E 15A 16E 17E China domestic listed peers SHANGHAI FOSUN-A 复星医药 600196 CH 54,265 CNY 15.5 13.4 12.5 7% 0.9 0.8 0.8 2.2 1.9 1.6 14.5 14.4 14.2 1.3 1.5 1.6 SHANG PHARM -A 上海医药 601607 CH 52,946 CNY 15.0 13.3 12.4 7% 1.8 1.6 1.5 1.5 1.3 1.2 10.0 10.3 10.2 1.2 1.3 1.4 BEIJING TONGRE-A 同仁堂 600085 CH 47,940 CNY 40.0 35.4 33.6 6% 2.3 2.0 1.9 5.0 4.6 4.0 13.1 12.9 12.5 0.7 0.8 0.9 HUADONG MEDICI-A 华东医药 000963 CH 40,893 CNY 23.1 19.6 17.2 10% 1.7 1.4 1.2 5.6 4.5 2.9 27.6 25.8 24.0 3.0 3.6 4.1 JOINTOWN PHARM-A 九州通 600998 CH 34,464 CNY 41.3 35.2 29.3 12% 2.1 1.7 1.5 3.5 3.3 3.1 8.5 9.5 10.8 0.4 0.5 0.6 CHINA NATIONAL-A 一致药业 000028 CH 27,865 CNY 28.2 23.3 19.8 12% 1.6 1.3 1.1 3.7 3.3 2.9 13.2 14.0 14.9 2.5 3.0 3.5 CHINA RESOURCE-A 华润三九 000999 CH 26,601 CNY 17.4 15.8 14.4 6% 1.9 1.7 1.5 2.5 2.2 2.0 15.2 14.7 14.2 1.3 1.4 1.6 SICHUAN KELUN-A 科伦药业 002422 CH 24,183 CNY 19.1 16.1 13.4 13% 1.0 0.8 0.7 1.2 1.1 1.0 7.3 8.6 9.6 0.7 0.9 1.1 NANJING PHARMA-A 南京医药 600713 CH 10,427 CNY 37.0 24.0 17.9 28% 1.0 0.7 0.5 3.6 3.2 2.7 8.8 11.9 14.4 0.3 0.4 0.5 Simple average 26.3 21.8 18.9 1.6 1.3 1.2 3.2 2.8 2.4 Weighted average 25.1 21.4 19.1 1.6 1.4 1.3 3.2 2.8 2.4
Name 中文名 Ticker Mkt Cap Currency –––––––––P/E–––––––––EPS CAGR –––––––––PEG––––––––– –––––––––P/B––––––––– –––––––––ROE–––––––– ––––––––EPS–––––––– (HK$mn) 15A 16E 17E 15A-17E 15A 16E 17E 15A 16E 17E 15A 16E 17E 15A 16E 17E HK listed China pharmaceutical companies SINOPHARM-H 国药控股 1099 HK 96,433 HKD 18.4 15.7 13.6 10% 0.9 0.8 0.7 2.4 2.1 2.0 13.8 14.5 15.0 1.6 1.9 2.1 FOSUN PHARMA-H 复星医药 2196 HK 54,266 HKD 16.1 13.8 12.4 9% 1.0 0.9 0.8 2.0 1.8 1.7 13.6 14.6 15.3 1.1 1.3 1.5 SHANGHAI PHARM-H 上海医药 2607 HK 52,947 HKD 11.9 10.6 9.6 7% 1.5 1.3 1.2 1.2 1.1 1.0 9.9 10.2 10.2 1.2 1.3 1.4 BAIYUNSHAN PH-H 白云山 874 HK 33,209 HKD 13.2 11.9 11.1 6% 1.0 0.9 0.9 1.9 1.6 1.5 14.1 14.4 13.1 1.1 1.2 1.3 CHINA MEDICAL SY 康哲药业 867 HK 26,265 HKD 16.5 13.6 11.5 13% 0.9 0.7 0.6 3.0 2.6 2.3 21.4 21.4 21.6 0.5 0.6 0.8 SIHUAN PHARM 四环医药 460 HK 20,728 HKD 7.6 8.0 7.0 3% 0.5 0.6 0.5 1.4 1.2 1.1 16.9 16.2 15.6 0.2 0.2 0.2 TRAD CHI MED 中国中药 570 HK 17,307 HKD 12.6 10.7 9.2 11% 0.8 0.6 0.6 1.3 1.2 1.0 11.2 11.0 11.7 0.3 0.3 0.4 CHINA SHINEWAY 神威药业 2877 HK 7,410 HKD 8.8 8.9 9.8 -3% na na na 1.0 1.0 0.9 12.6 11.6 9.9 0.9 0.8 0.8 THE UNITED LABOR 联邦制药 3933 HK 5,369 HKD 13.3 10.9 9.4 12% 0.9 0.7 0.6 0.8 0.7 0.7 6.0 6.7 7.4 0.2 0.3 0.4 CHINA NT PHARMA 泰凌医药 1011 HK 3,428 HKD 21.6 16.0 12.3 21% 0.7 0.5 0.4 2.9 2.5 2.1 12.6 15.5 17.7 0.1 0.1 0.2 PIONEER PHARM 中国先锋医药 1345 HK 2,773 HKD 8.8 7.6 8.1 3% na na na 1.6 1.5 na 21.6 22.8 21.3 0.2 0.2 0.2 ESSEX BIO-TECH 亿胜生物科技 1061 HK 2,328 HKD 17.3 13.6 10.1 20% 0.5 0.4 0.3 4.4 3.4 2.6 28.0 26.3 na 0.2 0.3 0.4 Simple average 13.8 11.8 10.3 0.9 0.7 0.7 2.0 1.7 1.5 Weighted average 14.9 12.9 11.4 1.0 0.8 0.7 2.0 1.7 1.6 Source: Bloomberg as of 19th Apr 2016
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Financial Analysis and Forecasts
Income Statement
Revenue
We cast our revenue forecasts by determining revenue contribution from its three segments: 1) human albumin; 2) anti-biotics; and 3) other business.
Figure 6: Revenue breakdown RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total Revenue 532,480 950,079 608,681 487,390 1,096,071 1,410,126 1,815,991 2,219,310 Growth rate, % 1935% 78.4% 46.7% -8.9% 15.4% 28.7% 28.8% 22.2%
Plasma Products* 251,790 630,975 401,808 268,440 670,248 876,116 1,179,229 1,380,583 Growth rate, % NA 150.6% 6.2% 30.7% 34.6% 17.1% % of total revenue 47.3% 66.4% 66.0% 55.1% 61.2% 62.1% 64.9% 62.2% Human Albumin (10g) - Old Brand Revenue 251,790 630,975 401,808 268,440 670,248 731,777 731,777 731,777 Growth rate, % NA 150.6% 6.2% 9.2% 0.0% 0.0% % of total revenue 47.3% 66.4% 66.0% 55.1% 61.2% 51.9% 40.3% 33.0% Human Albumin (10g) - New Brand Revenue - 144,340 447,453 648,806 Growth rate, % NA NA 210.0% 45.0% % of total revenue 0.0% 10.2% 24.6% 29.2%
Anti-biotics* 281,907 308,244 173,893 143,481 317,374 326,895 333,433 333,433 Growth rate, % 976.8% 9.3% 3.0% 3.0% 2.0% 0.0% % of total revenue 52.9% 32.4% 28.6% 29.4% 29.0% 23.2% 18.4% 15.0% Axetine (0.75g) Revenue 65,237 74,646 39,252 51,599 90,851 93,577 95,448 95,448 Growth rate, % 568.7% 14.4% 21.7% 3.0% 2.0% 0.0% Axetine (1.5g) Revenue 173,547 184,361 102,638 65,221 167,859 172,895 176,353 176,353 Growth rate, % 974.2% 6.2% (9.0%) 3.0% 2.0% 0.0% Mercedof (1.0g) Revenue 28,911 30,008 20,912 17,468 38,380 39,531 40,322 40,322 Growth rate, % 10,728.1% 3.8% 27.9% 3.0% 2.0% 0.0% Mercedof (2.0g) Revenue 14,212 19,229 11,091 9,193 20,284 20,893 21,310 21,310 Growth rate, % NA 35.3% 5.5% 3.0% 2.0% 0.0%
Other Drugs* 0 14,486 34,699 77,424 112,123 211,641 309,158 512,418 Growth rate, % NA NA 674.0% 88.8% 46.1% 65.7% % of total revenue 0.0% 1.5% 5.7% 15.9% 10.2% 15.0% 17.0% 23.1% Taurolite Revenue - 6,065 26,543 61,875 88,418 159,152 230,771 392,311 Growth rate, % NA NA 1,357.8% 80.0% 45.0% 70.0% TAD Revenue - 4,050 4,951 7,695 12,646 15,175 21,033 29,151 Growth rate, % NA NA 212.2% 20.0% 38.6% 38.6% Esafosfina Revenue - 4,371 3,205 7,754 10,959 28,493 39,891 59,836 Growth rate, % NA NA 150.7% 160.0% 40.0% 50.0%
Q10 Revenue 100 100 8,820 17,464 31,120 Growth rate, % NA NA 8,720.0% 98.0% 78.2%
Business Tax (1,217) (3,626) (1,720) (1,954) (3,674) (4,527) (5,830) (7,125)
Source: Company, CMS (HK) estimates * Pre-tax revenues which are subject to business tax adjustment
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
1) Human albumin – accounted for 61% of total revenue in FY15
We expect human albumin to grow at 31%/35%/17% in FY16E/17E/18E. The moderate growth in FY15 is mainly due to the existing human albumin supply constraint caused by Octapharma’s Vienna site gradually reaching its full capacity. We believe the slowdown is transitory and the product to resume robust growth in FY16E/17E/18E, given Octapharma will quickly ramp-up its supply from a new site located in Stockholm to meet the increasing demand from China. We also factored in a potential 3% increase in ASP for human albumin product in FY16E, to reflect the industry trend after lifting the price ceiling by the government. Meanwhile, we expect 3% purchase price increase from Octapharma in FY16E amid potential RMB devaluation in the future.
Figure 7: Human albumin revenue and growth Figure 8: Anti-biotics revenue and growth (RMB mn) (RMB mn)
Human Albumin YoY Antibiotics (Axetine and Medocef) YoY 1,600 160.0% 340 10% 151% 9.3% 1,400 140.0% 330 9%
Thousands 8% 1,200 120.0% Thousands 320 7% 310 1,000 100.0% 6% 300 800 80.0% 5% 290 600 60.0% 4% 280 3.0% 3.0% 3% 400 31% 40.0% 35% 270 2.0% 2% 17% 200 20.0% 260 1% 6% 0 0.0% 250 0% 0% 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
2) Anti-biotics – accounted for 29% of total revenue in FY15
We expect the growth of anti-biotics segment to be stagnant in FY16E-18E. The segment grew at 3% in FY15, much slower than c.9% growth in FY14 as a result of increased sales volume due to low base and intensive marketing efforts. We expect growth to be stagnant over upcoming years amid the stringent policy control over the use of antibiotics. Meanwhile, we assume limited ASP erosion from the tendering for both Axetine and Medocef, as the company is currently deploying a low price strategy, which sets its ASP well below the tender price for better penetration into the new market. We also expect the purchasing price for both Axetine and Mercedof to largely stay put as the purchasing price has been pre-determined with Medochemie.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
3) Other drugs – accounted for 10% of total revenue in FY15
Exponential growth ahead. We project the segment growth is heading into the exponential phase with a CAGR of c.56% during FY16E/17E/18E. Major growth drivers include: 1) significant volume ramp-up as the products are new to the market with relatively low base in FY15; 2) revenue contribution from sales of Taurolite, TAD and Esafosfina commenced in late 2014 while Q10 only generate revenue starting Dec 2015; and 3) exclusive distribution rights were obtained for the three products starting in January 2015. The exclusive rights remove the additional layers when negotiating with the suppliers, which enable the company to secure a much more favourable purchasing price in the long run. It is also worth mentioning that the company also proportionally lowers its ASP aligning with its low price marketing strategies.
Figure 9: Taurolite, TAD, Esafosfina and Q10 revenue and growth (RMB mn)
Others (Taurolite, TAD, Esafosfina and Q10) YoY 600 800%
700% 500 674%
Thousands 600% 400 500%
300 400%
300% 200 200% 100 100% 89% 46% 66% 0 0% 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates
Figure 10: Total revenue and growth (RMB mn) Figure 11: Revenue breakdown by product (RMB mn)
Total sales YoY Human Albumin Axetine Mercedof Taurolite 2,500 90.0% TAD Esafosfina Q10 2,500 78% 80.0% 2,000 Thousands 70.0% 2,000 60.0% 1,500 50.0% 1,500
40.0% 1,000 1,000 29% 29% 30.0% 22% 500 20.0% 500 15% 10.0% 0 0 0.0% 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E
Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Gross Margin
We expect gross margin to gradually expand in FY16E-18E. The margin varies among different products due to different terms with different suppliers. We expect blended margin to expand in the upcoming years, which is supported by: 1) potential increase in ASP for the human albumin products; 2) obtaining better purchasing terms with Octapharma after gaining the exclusive distribution right in 24 provinces; and 3) better product mix with more contribution from the higher margin products, such as Taurolite and Esafosfina.
Sinco has relatively lower gross margin compared with other industry peers. This is largely attributable to the different business model with its peers. For example, CMS (867 HK) has relatively higher gross margin due to their direct sales model to the hospitals which bear higher gross margin, while Sinco is currently relying on its key sub- distributors to on-sell its products.
Figure 12: Gross profit breakdown RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total Gross Profit 61,119 129,770 82,705 69,802 152,507 211,106 277,872 365,336 Gross Profit Margin 11.5% 13.7% 13.6% 14.3% 13.9% 15.0% 15.3% 16.5%
Plasma Products 251,790 630,975 401,808 268,440 670,248 876,116 1,179,229 1,380,583 Human Albumin (10g) - Old Brand Gross profit 40,236 94,618 54,117 29,154 83,271 89,784 89,784 89,784 Gross profit margin, % 16.0% 15.0% 13.5% 10.9% 12.4% 12.3% 12.3% 12.3% Growth rate, % NA 135.2% (12.0%) 7.8% 0.0% 0.0% Human Albumin (10g) - New Brand Gross profit -- 17,710 54,900 79,604 Gross profit margin, % NA 12.3% 12.3% 12.3% Growth rate, % NA NA 210.0% 45.0%
Anti-biotics 281,907 308,244 173,893 143,481 317,374 326,895 333,433 333,433 Axetine (0.75g) Gross profit 3,826 7,949 4,212 7,122 11,334 12,212 12,456 12,456 Gross profit margin, % 5.9% 10.6% 10.7% 13.8% 12.5% 13.1% 13.1% 13.1% Growth rate, % 211.6% 107.8% 42.6% 7.7% 2.0% 0.0% Axetine (1.5g) Gross profit 13,293 21,610 12,384 9,064 21,448 20,017 20,418 20,418 Gross profit margin, % 7.7% 11.7% 12.1% 13.9% 12.8% 11.6% 11.6% 11.6% Growth rate, % 570.0% 62.6% (0.7%) (6.7%) 2.0% 0.0% Mercedof (1.0g) Gross profit 3,659 4,761 3,122 2,183 5,305 6,000 6,120 6,120 Gross profit margin, % 12.7% 15.9% 14.9% 12.5% 13.8% 15.2% 15.2% 15.2% Growth rate, % 10,987.9% 30.1% 11.4% 13.1% 2.0% 0.0% Mercedof (2.0g) Gross profit 1,322 2,851 1,611 1,289 2,900 3,527 3,598 3,598 Gross profit margin, % 9.3% 14.8% 14.5% 14.0% 14.3% 16.9% 16.9% 16.9% Growth rate, % NA 115.7% 1.7% 21.6% 2.0% 0.0%
Other Drugs 0 14,486 34,699 77,424 112,123 211,641 309,158 512,418 Taurolite Gross profit - 401 9,476 18,571 28,047 54,502 79,028 134,348 Gross profit margin, % NA 6.6% 35.7% 30.0% 31.7% 34.2% 34.2% 34.2% Growth rate, % NA NA 379.8% 94.3% 45.0% 70.0% TAD Gross profit - (24) 595 1,523 2,118 4,080 5,500 7,406 Gross profit margin, % NA (0.6%) 12.0% 19.8% 16.7% 26.9% 26.2% 25.4% Growth rate, % NA NA (8,925.0%) 92.7% 34.8% 34.6% Esafosfina Gross profit - 1,230 1,429 301 1,730 5,654 7,916 11,874 Gross profit margin, % NA 28.1% 45% 3.9% 15.8% 19.8% 19.8% 19.8% Growth rate, % NA NA 40.7% 226.8% 40.0% 50.0%
Q10 Gross profit 28 28 2,146 3,981 6,852 Gross profit margin, % 28% 28.0% 24.3% 22.8% 22.0% Growth rate, % NA 7,562.9% 85.6% 72.1%
Source: Company, CMS (HK) channel check and estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Operating Expenses
We expect SG&A to be back to stable starting FY17E. We expect a spike in general and admin expenses in 2H15 and 1H16 caused by a one-time listing expense during the peirod. SG&A is expected to return to normal level of c.3.2% after this non-recurring event. It is worth noting that Sinco currently operates on an asset-light business model, while other major competitors are asset-heavy with internal marketing teams, such as CMS (867 HK). This greatly boosts efficiency to the company with significantly better SG&A management compared with industry peers, in our view.
Figure 13: Operating expenses breakdown Margins 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E SG&A 2.3% 2.6% 2.7% 6.1% 4.2% 4.4% 3.2% 3.0% Distribution and selling expenses 0.4% 0.7% 0.4% 0.6% 0.5% 0.6% 0.6% 0.6% General and admin expenses 1.9% 1.8% 2.3% 5.5% 3.7% 3.8% 2.6% 2.4% Operating income 9.2% 11.1% 10.9% 8.2% 9.7% 9.3% 12.1% 13.4%
Source: Company, CMS (HK) estimates
Figure 14: Selling & distribution costs breakdown RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total Selling & Distribution Costs (2,358) (6,792) (2,585) (3,124) (5,709) (9,064) (11,673) (14,266) % of total revenue 0.4% 0.7% 0.4% 0.6% 0.5% 0.6% 0.6% 0.6% Growth rate, % 948.0% 188.0% (15.9%) 58.8% 28.8% 22.2% Marketing & promotion expenses (21) (2,104) (87) (163) (250) (322) (414) (506) % of total revenue 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth rate, % NA 9,919.0% (89.3%) (87.3%) (88.1%) 28.7% 28.8% 22.2%
Salaries & benefits for sales employees (445) (2,601) (1,342) (1,659) (3,001) (5,358) (6,901) (8,433) % of total revenue 0.1% 0.3% 0.2% 0.3% 0.3% 0.4% 0.4% 0.4% Growth rate, % 617.7% 484.5% 23.3% 9.6% 15.4% 78.6% 28.8% 22.2%
Transportation expenses (1,253) (1,139) (664) (390) (1,054) (1,692) (2,179) (2,663) % of total revenue 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Growth rate, % NA (9.1%) (14.0%) 6.3% (7.5%) 60.5% 28.8% 22.2%
Traveling expenses (583) (848) (453) (748) (1,201) (1,410) (1,816) (2,219) % of total revenue 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% Growth rate, % 273.7% 45.5% 344.1% 0.3% 0.3% 17.4% 28.8% 22.2%
Administrative and other expenses (56) (100) (39) (164) (203) (282) (363) (444) % of total revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth rate, % 700.0% 78.6% 143.8% 95.2% 103.0% 38.9% 28.8% 22.2%
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 15: Total administrative expenses breakdown RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total Administrative expenses (9,866) (17,520) (13,705) (26,819) (40,524) (53,069) (46,420) (53,296) % of total revenue 1.9% 1.8% 2.3% 5.5% 3.7% 3.8% 2.6% 2.4% Growth rate, % 269.1% 77.6% 93.9% 156.6% 131.3% 31.0% (12.5%) 14.8% Salaries and benefits (2,522) (3,598) (3,008) (3,323) (6,331) (8,145) (10,489) (12,819) % of total revenue 0.5% 0.4% 0.5% 0.7% 0.6% 0.6% 0.6% 0.6% Growth rate, % 169.2% 42.7% 92.9% 63.0% 76.0% 28.7% 28.8% 22.2%
Consultation and service fees (40) (3,097) (648) (1,964) (2,612) (3,360) (4,328) (5,289) % of total revenue 0.0% 0.3% 0.1% 0.4% 0.2% 0.2% 0.2% 0.2% Growth rate, % (29.8%) 7,642.5% (37.5%) (4.7%) (15.7%) 28.7% 28.8% 22.2%
Office expenses (1,353) (2,126) (1,419) (1,141) (2,560) (3,294) (4,241) (5,183) % of total revenue 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Growth rate, % 137.8% 57.1% 33.6% 7.2% 20.4% 28.7% 28.8% 22.2%
Entertainment fee (775) (775) (442) (805) (1,247) (1,604) (2,066) (2,525) % of total revenue 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% Growth rate, % 101.3% 0.0% 35.2% 79.7% 60.9% 28.7% 28.8% 22.2%
Travelling expenses (690) (2,091) (826) (1,369) (2,195) (2,824) (3,637) (4,444) % of total revenue 0.1% 0.2% 0.1% 0.3% 0.2% 0.2% 0.2% 0.2% Growth rate, % 83.0% 203.0% 36.1% (7.7%) 5.0% 28.7% 28.8% 22.2%
Tax charges (526) (1,119) (528) (671) (1,199) (1,543) (1,987) (2,428) % of total revenue 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Growth rate, % 26,200% 112.7% 0.2% 13.3% 7.1% 28.7% 28.8% 22.2%
Research expenses (770) (1,725) (1,197) (1,831) (3,028) (2,485) (3,201) (3,912) % of total revenue 0.1% 0.2% 0.2% 0.4% 0.3% 0.2% 0.2% 0.2% Growth rate, % NA 124.0% 32.4% 123.0% 75.5% (17.9%) 28.8% 22.2%
Motor vehicle related fees (437) (804) (398) (582) (980) (1,261) (1,624) (1,984) % of total revenue 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Growth rate, % 432.9% 84.0% 15.7% 26.5% 21.9% 28.7% 28.8% 22.2%
Depreciation and amortisation (1,006) (1,878) (2,515) (2,670) (5,185) (6,309) (9,245) (8,754) % of total revenue 0.2% 0.2% 0.4% 0.5% 0.5% 0.4% 0.5% 0.4% Growth rate, % 415.9% 86.7% 275.9% 120.8% 176.1% 21.7% 46.5% (5.3%)
Education fee (1,728) (195) (195) (575) (770) (991) (1,276) (1,559) % of total revenue 0.3% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% Growth rate, % 19,100.0% (88.7%) 786.4% 232.4% 294.9% 28.7% 28.8% 22.2%
Listing expenses 0 0 (2,479) (11,741) (14,220) (18,000) - - % of total revenue 0.0% 0.0% 0.4% 2.4% 1.3% 1.3% 0.0% 0.0% Growth rate, % NA NA NA NA NA 26.6% (100.0%) NA
Director fee - - - - - (3,000) (4,000) (4,000) % of total revenue - - - - - 0.2% 0.2% 0.2% Growth rate, % - - - - - NA 33.3% 0.0%
Other admin. expenses (19) (112) (50) (147) (197) (253) (326) (399) % of total revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth rate, % (68.3%) 489.5% 400.0% 44.1% 75.9% 28.7% 28.8% 22.2%
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Other Income/Expenses
Interest income and expenses are largely remain stable down the road. We expect interest income of RMB1.1mn/2.5mn/3.9mn in FY16E/17E/18E, respectively, which represent a stable 0.8% of cash during the period. We expect a RMB6mn foreign exchange loss in FY16E, down from RMB11mn in FY15 amid RMB depreciated quite significantly starting from last Aug, and it is expected to remain as one of the major swing factors in FY16E. Our model factored in a c.2% RMB devaluation to 6.7 against USD in FY16E and expect the currency fluctuation to be somewhat stable in FY17E.
Figure 16: Other income/expenses breakdown RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Other income 4,920 2,295 376 451 827 1,134 2,462 3,946 % of total revenue 0.9% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2% Growth rate, % 2,188.4% (53.4%) (4.3%) (76.3%) (64.0%) 37.1% 117.0% 60.3% Interest income 336 1,402 176 214 390 1,134 2,462 3,946 % of cash 0.1% 0.1% 0.0% 0.0% 0.8% 0.8% 0.8% 0.8% Foreign exchange gains, net 3,971 0 - - 0 - - - Government grants 500 870 200 215 415 - - - Others 113 23 - 22 22 - - -
Other Expenses (1,834) (7,715) (4,932) (8,426) (13,358) (8,446) (9,252) (10,053) % of total revenue 0.3% 0.8% 0.8% 1.7% 1.2% 0.6% 0.5% 0.5% Growth rate, % 9,070.0% 320.7% 40.9% 99.9% 73.1% (36.8%) 9.5% 8.7% Bank Charges (1,834) (2,062) (901) (1,275) (2,176) (2,799) (3,605) (4,406) Foreign exchange loss, net 0 (5,647) (4,031) (7,136) (11,167) (5,647) (5,647) (5,647) Others 0 (6) - (15) (15) - - -
Source: Company, CMS (HK) estimates
Tax Rate
We expect the tax rate to be 12%/9%15% in FY16E/17E/18E. The lower tax rate starting FY16E is mainly due to the acquisition of Linzhi Ziguang, a company located in Linzhi, Tibet and primarily engaged in the sale of pharmaceutical products. The company is entitled to a lower tax rate of 9% in FY16E and FY17E and the tax rate is expected to be on a preferential rate of 15% until 2020, and then 25% onwards. It is worth noticing that the lower tax rate only starts from 2Q16, so we conservatively assume 12% as the tax rate on a whole year basis in FY16E.
Net Income
Our model derived the adjusted net income to be RMB140mn/191mn/245mn in FY16E-18E. The lower growth rate of adjusted net income in FY15 was mainly attributable to the higher SG&A expenses and c.RMB11mn loss in FX in FY15. The high growth in FY16E will be mainly driven by: 1) healthy revenue growth thanks to its new products; 2) better margin and efficiency; 3) lower tax rate; and 4) lower base in FY15.
Figure 17: Adjusted net income and growth (RMB mn) Figure 18: Margin trend and forecasts 20% Adj. Net Income YoY Gross Margin Adj. Operating Margin Adj. Net Margin 300 100% 18% 16.5% 90% 86% 15.3% 250 16% 15.0% 80% 13.7% 13.9%
Thousands 13.4% 14% 67% 70% 12.1% 200 11.5% 11.1% 12% 10.6% 60% 9.7% 9.2% 10% 11.1% 150 50% 10.5% 9.9% 8% 8.1% 40% 8.4% 100 36% 28% 6% 7.6% 30% 20% 4% 50 10% 2% 4% 0 0% 0% 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Balance Sheet & Cash Flow
Healthy cash balance and operating cash flow. We expect Sinco to gradually pay back its short-term loans of RMB50mn in FY16E. The cash level is expected to stand at RMB244mn/368mn/615mn in FY16E/17E/18E, respectively, while operating cash flow to be RMB40mn/149mn/270mn during the respective period, the transitory dip in operating cash flow in FY16E will be largely due to much higher CAPEX during the period.
Figure 19: Cash position and forecasts (RMB mn) Figure 20: Operating cash flow (RMB mn) 700 300 270 615 600 250
500 200 368 400 149 150 300 244 100 200 78 53 46 40 70 50 100 44 60
0 0 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
We expect CAPEX to be RMB49mn/21mn/21mn in FY16E/17E/18E. Sinco is now constructing a cold chain facility as well as a research and development base in Shuangliu County, Chengdu in Sichuan Province with a total construction area of 87,000 sqm. The construction of the first phase (40,000 sqm) is expected to be completed by the FY16E, and second phase (47,000 sqm) is expected to commence in early 2017 and ready by 2018. After this expansion we assume the CAPEX would stay at a normal maintenance level at c.1% of its revenue.
Cash Conversion Days to be stable at 30/30/29 days in FY16E-18E. Sinco has relatively short receivable days and payable days compared with peers, thanks to its asset-light business model and full prepayment from all of its customers due to the supply shortage of the human albumin product.
Figure 21: CAPEX and forecast (RMB’000) Figure 22: Cash conversion cycle (days) 60,000 70 60 50,013 48,936 58 59 50,000 50
40,000 40 56 33,447 58 32 28 28 30 28 30 28 30 29 30,000 21,000 21,000 20 20,000 10 19 20 20 20 9 10,245 3 10,000 0 (3) (6) (16) (18) (18) (19) (10) 0 2013A 2014A 2015A 2016E 2017E 2018E 2013A 2014A 2015A 2016E 2017E 2018E AR days AP days Inv days Cash conversion cycle Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Sensitivity Analysis
1. Change in ASP of human albumin product
We learnt from the sensitivity analysis that potential change in ASP of human albumin product acts as one of the biggest swing factor to the future earnings. We cast our sensitivity analysis by assuming no ASP increase in human albumin product in FY16E as our bear case, 3% increase as our base case and 5% increase as our bull case. The analysis shows that bear case would have c.-15% discount in adjusted net income to RMB118mn compared with our base case of RMB140mn in FY16E, while our bull case suggests RMB155mn in FY16E, which equals c.+11% upside compared with our base case scenario.
Figure 23: Sensitivity analysis on potential ASP increase in human albumin product Bear case (+0% ASP) Base case (+3% ASP) Bull case (+5% ASP) RMB'000 2016E 2017E 2016E 2017E 2016E 2017E Sales 1,384,689 1,781,754 1,410,126 1,815,991 1,427,083 1,838,815 Cost of sales (1,199,019) (1,538,119) (1,199,019) (1,538,119) (1,199,019) (1,538,119) Gross profit 185,670 243,635 211,106 277,872 228,064 300,696 SG&A expenses (79,505) (57,247) (80,133) (58,093) (80,552) (58,657) Distribution and selling expenses (8,901) (11,453) (9,064) (11,673) (9,173) (11,820) General and admin expenses (70,604) (45,794) (71,069) (46,420) (71,379) (46,836) Operating income 106,165 186,388 130,973 219,779 147,512 242,040 Other income/gain (0) 0 0 (0) 0 0 Other expense (8,396) (9,184) (8,446) (9,252) (8,480) (9,298) Finance costs (2,331) (1,468) (1,998) (670) (1,776) (139) Interest income 801 1,664 1,134 2,462 1,356 2,993 Interest cost (3,132) (3,132) (3,132) (3,132) (3,132) (3,132) Non-operating income (10,727) (10,652) (10,444) (9,923) (10,256) (9,436) Profit Before Taxes 95,438 175,736 120,528 209,856 137,256 232,603 Income Tax (11,453) (15,816) (14,463) (18,887) (16,471) (20,934) Tax Rate 12% 9% 12% 9% 12% 9% Adjusted Net Income 117,825 159,919 139,905 190,969 154,625 211,669 Adjusted EPS 0.073 0.099 0.087 0.118 0.096 0.131
Margins 2016E 2017E 2016E 2017E 2016E 2017E Gross Profit 13.4% 13.7% 15.0% 15.3% 16.0% 16.4% SG&A 4.4% 3.2% 4.4% 3.2% 4.4% 3.2% EBITDA margin 7.9% 10.7% 9.5% 12.4% 10.5% 13.4% Operating income 7.7% 10.5% 9.3% 12.1% 10.3% 13.2% Finance costs 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Profit before tax margin 6.9% 9.9% 8.5% 11.6% 9.6% 12.6% Net margin 6.1% 9.0% 7.5% 10.5% 8.5% 11.5% Adjusted Net margin 8.5% 9.0% 9.9% 10.5% 10.8% 11.5%
YoY% 2016E 2017E 2016E 2017E 2016E 2017E Total Revenue 26% 29% 29% 29% 30% 29% Gross profit 22% 31% 38% 32% 50% 32% Distribution and selling expenses 56% 29% 59% 29% 61% 29% General and admin expenses 74% -35% 75% -35% 76% -34% Operating income 0% 76% 23% 68% 39% 64% Profit Before Taxes 10% 84% 39% 74% 58% 69% Net Income 21% 90% 53% 80% 74% 75% Adjusted Net Income 41% 36% 67% 36% 85% 37%
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
2. Change in RMB foreign exchange rate
Another major swing factor in FY16E is potential RMB FX fluctuation. We set exchange rate of RMB/USD of 7.0 as our bear case, 6.7 to be our base case and 6.5 as our bull case. The analysis shows that bear case would have c.-31% discount in adjusted net income to RMB96mn compared with our base case of RMB140mn in FY16E, while our bull case suggests RMB169mn in FY16E, which equals c.+21% upside compared with our base case scenario.
Figure 24: Sensitivity analysis on future RMB FX fluctuation Bear case (7.0 RMB/USD) Base case (6.7 RMB/USD) Bull case (6.5 RMB/USD) RMB'000 2016E 2017E 2016E 2017E 2016E 2017E Sales 1,410,126 1,815,991 1,410,126 1,815,991 1,410,126 1,815,991 Cost of sales (1,247,722) (1,599,592) (1,199,019) (1,538,119) (1,166,551) (1,497,137) Gross profit 162,404 216,399 211,106 277,872 243,575 318,854 SG&A expenses (80,133) (58,093) (80,133) (58,093) (80,133) (58,093) Distribution and selling expenses (9,064) (11,673) (9,064) (11,673) (9,064) (11,673) General and admin expenses (71,069) (46,420) (71,069) (46,420) (71,069) (46,420) Operating income 82,270 158,306 130,973 219,779 163,441 260,761 Other income/gain (0) 0 0 (0) 0 0 Other expense (8,446) (9,252) (8,446) (9,252) (8,446) (9,252) Finance costs (2,631) (2,159) (1,998) (670) (1,576) 322 Interest income 501 973 1,134 2,462 1,557 3,454 Interest cost (3,132) (3,132) (3,132) (3,132) (3,132) (3,132) Non-operating income (11,078) (11,411) (10,444) (9,923) (10,022) (8,931) Profit Before Taxes 71,192 146,895 120,528 209,856 153,419 251,830 Income Tax (8,543) (13,221) (14,463) (18,887) (18,410) (22,665) Tax Rate 12% 9% 12% 9% 12% 9% Adjusted Net Income 96,489 133,675 139,905 190,969 168,849 229,166 Adjusted EPS 0.060 0.083 0.087 0.118 0.105 0.142
Margins 2016E 2017E 2016E 2017E 2016E 2017E Gross Profit 11.5% 11.9% 15.0% 15.3% 17.3% 17.6% SG&A 4.4% 3.2% 4.4% 3.2% 4.4% 3.2% EBITDA margin 6.0% 9.0% 9.5% 12.4% 11.8% 14.6% Operating income 5.8% 8.7% 9.3% 12.1% 11.6% 14.4% Finance costs 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% Profit before tax margin 5.0% 8.1% 8.5% 11.6% 10.9% 13.9% Net margin 4.4% 7.4% 7.5% 10.5% 9.6% 12.6% Adjusted Net margin 6.8% 7.4% 9.9% 10.5% 12.0% 12.6%
YoY% 2016E 2017E 2016E 2017E 2016E 2017E Total Revenue 29% 29% 29% 29% 29% 29% Gross profit 6% 33% 38% 32% 60% 31% Distribution and selling expenses 59% 29% 59% 29% 59% 29% General and admin expenses 75% -35% 75% -35% 75% -35% Operating income -23% 92% 23% 68% 54% 60% Profit Before Taxes -18% 106% 39% 74% 77% 64% Net Income -10% 113% 53% 80% 94% 70% Adjusted Net Income 15% 39% 67% 36% 102% 36%
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Sensitivity test
We showcase our sensitivity test when we combined two variables together, which indicates Sinco’s bottom- line will be greatly affected by change in ASP to the human albumin product as well as RMB fluctuation going forward.
Figure 25: Sensitivity matrix on FY16E adjusted net profit (RMB’000) RMB/USD valuation 6.5 6.6 6.7 6.8 6.9 7.0 0% 146,769 132,297 117,825 103,353 88,881 74,409 1% 154,129 139,657 125,185 110,713 96,241 81,769 2% 161,489 147,017 132,545 118,073 103,601 89,129 3% 168,849 154,377 139,905 125,433 110,961 96,489 4% 176,209 161,737 147,265 132,793 118,321 103,849 5% 183,569 169,097 154,625 140,153 125,681 111,209
Adjust in albumin ASP albumin in Adjust 6% 190,929 176,457 161,985 147,513 133,041 118,569 Source: Company, CMS (HK) estimates
Figure 26: Sensitivity matrix on FY17E net profit (RMB’000) RMB/USD valuation 6.5 6.6 6.7 6.8 6.9 7.0 0% 198,116 179,018 159,919 140,821 121,723 102,625 1% 208,466 189,368 170,269 151,171 132,073 112,975 2% 218,816 199,718 180,619 161,521 142,423 123,325 3% 229,166 210,067 190,969 171,871 152,773 133,675 4% 239,516 220,417 201,319 182,221 163,123 144,025 5% 249,866 230,767 211,669 192,571 173,473 154,374
Adjust in albumin ASP albumin in Adjust 6% 260,216 241,117 222,019 202,921 183,823 164,724 Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Financial Models
Figure 27: Income statement RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Sales 532,480 950,079 608,681 487,390 1,096,071 1,410,126 1,815,991 2,219,310 Cost of sales (471,361) (820,309) (525,976) (417,588) (943,564) (1,199,019) (1,538,119) (1,853,974) Gross profit 61,119 129,770 82,705 69,802 152,507 211,106 277,872 365,336 SG&A expenses (12,224) (24,312) (16,290) (29,943) (46,233) (80,133) (58,093) (67,562) Distribution and selling expenses (2,358) (6,792) (2,585) (3,124) (5,709) (9,064) (11,673) (14,266) General and admin expenses (9,866) (17,520) (13,705) (26,819) (40,524) (71,069) (46,420) (53,296) Operating income 48,895 105,458 66,415 39,859 106,274 130,973 219,779 297,774 Other income/gain 4,584 893 200 237 437 0 (0) (0) Other expense (1,834) (7,715) (4,932) (8,426) (13,358) (8,446) (9,252) (10,053) Finance costs (726) (4,824) (3,841) (2,874) (6,715) (1,998) (670) 813 Interest income 336 1,402 176 214 390 1,134 2,462 3,946 Interest cost (1,062) (6,226) (4,017) (3,088) (7,105) (3,132) (3,132) (3,132) Non-operating income 2,024 (11,646) (8,573) (11,063) (19,636) (10,444) (9,923) (9,240) EBITDA 52,651 100,514 66,720 36,863 103,583 133,880 224,817 301,520 Profit Before Taxes 50,919 93,812 57,842 28,796 86,638 120,528 209,856 288,534 Income Tax (7,932) (13,683) (9,143) (8,054) (17,197) (14,463) (18,887) (43,280) Tax Rate 16% 15% 16% 28% 20% 12% 9% 15% Minority interest (6,448) (10,762) 0 173 173 0 0 0 Net Income 42,987 80,129 48,699 20,742 69,441 106,065 190,969 245,254 Adjusted Net Income 42,987 80,129 51,178 32,463 83,641 139,905 190,969 245,254 Basic EPS 0.036 0.067 0.041 0.017 0.058 0.066 0.118 0.152 Adjusted EPS 0.036 0.067 0.043 0.027 0.070 0.087 0.118 0.152 Basic Weighted Average Shares 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,615,220 1,615,220 1,615,220
Margins 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Gross Profit 11.5% 13.7% 13.6% 14.3% 13.9% 15.0% 15.3% 16.5% SG&A 2.3% 2.6% 2.7% 6.1% 4.2% 4.4% 3.2% 3.0% Distribution and selling expenses 0.4% 0.7% 0.4% 0.6% 0.5% 0.6% 0.6% 0.6% General and admin expenses 1.9% 1.8% 2.3% 5.5% 3.7% 3.8% 2.6% 2.4% EBITDA margin 9.9% 10.6% - - 9.5% 9.5% 12.4% 13.6% Operating income 9.2% 11.1% 10.9% 8.2% 9.7% 9.3% 12.1% 13.4% Other income/gain 0.9% 0.1% - - 0.0% 0.1% 0.1% 0.2% Other expense 0.3% 0.8% - - 1.2% 0.6% 0.5% 0.5% Finance costs -0.1% -0.5% - - -0.6% 0.2% 0.2% 0.1% Profit before tax margin 9.6% 9.9% 9.5% 5.9% 7.9% 8.5% 11.6% 13.0% Minority interest as % of PBT 12.7% 11.5% 0.0% -0.6% -0.2% 0.0% 0.0% 0.0% Net margin 8.1% 8.4% 8.0% 4.3% 6.3% 7.5% 10.5% 11.1% Adjusted Net margin 8.1% 8.4% 8.4% 6.7% 7.6% 9.9% 10.5% 11.1%
YoY% 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total Revenue 1935% 78% 47% -9% 15% 29% 29% 22% Gross profit 1791% 112% 32% 4% 18% 38% 32% 31% Distribution and selling expenses 188% -7% -22% -16% 59% 29% 22% General and admin expenses 269% 78% 94% 157% 131% 75% -35% 15% Operating income 14539% 116% 25% -24% 1% 23% 68% 35% Profit Before Taxes 9526% 84% 24% -39% -8% 39% 74% 37% Net Income 15475% 86% 24% -49% -13% 53% 80% 28% Adjusted Net Income 15475% 86% 30% -20% 4% 67% 36% 28% Adjusted EPS 15475% 86% 30% -20% 4% 24% 36% 28% Diluted Weighted Average Shares 0% 0% 0% 0% 35% 0% 0%
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 28: Balance sheet RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Cash and ST Investments 44,455 70,216 76,114 60,206 60,206 245,416 370,018 616,381 Cash and cash equivalents 27,851 58,280 63,340 38,138 38,138 223,347 347,949 594,312 Pledged Bank Balances 16,604 11,936 12,774 22,068 22,068 22,068 22,068 22,068 Short Term Receivables 8,932 36,916 116,355 77,186 77,186 77,348 121,664 121,548 Inventories - Total 149,085 100,676 94,023 46,563 46,563 89,936 146,049 138,396 Prepayments, Deposits and Others 59,319 30,224 24,771 35,008 35,008 35,008 35,008 35,008 Due from Related Party 11,402 50,060 0 0 0 0 0 0 Other Current Assets 0 0 0 0 0 0 0 Total Current Assets 273,193 288,092 311,263 218,963 218,963 447,707 672,739 911,332 Payments in Advance 39,808 48,028 48,042 69,427 69,427 69,427 69,427 69,427 Deposits 5,000 5,000 3,000 3,000 3,000 3,000 3,000 3,000 Equity method investment 0 0 0 0 0 0 0 0 Property. Plant & Equipment - Net 58,844 100,094 98,648 96,922 96,922 139,549 151,304 163,549 Property Plant & Equipment - Gross 60,045 103,138 104,207 105,150 105,150 154,086 175,086 196,086 Accumulated Depreciation 1,201 3,044 5,559 8,228 8,228 14,537 23,782 32,536 Other Assets 0 0 0 0 0 0 0 0 Goodwill 0 0 35,526 35,526 35,526 35,526 35,526 35,526 Intangible assets 0 0 42,901 40,378 40,378 35,333 30,288 25,243 Total Non-current Asset 103,652 153,122 228,117 245,253 245,253 282,835 289,545 296,745 Total Assets 376,845 441,214 539,380 464,216 464,216 730,542 962,283 1,208,077 Accounts Payable 7,546 18,637 115,971 62,793 62,793 55,466 96,238 96,778 Advances from customers 214,149 128,450 82,817 33,707 33,707 33,707 33,707 33,707 Interest-bearing Bank Loans 51,515 91,788 72,603 81,915 81,915 31,915 31,915 31,915 Income Taxes Payable 7,312 5,580 5,982 8,909 8,909 8,909 8,909 8,909 Other Current Liabilities 47,967 73,274 89,195 83,338 83,338 53,338 53,338 53,338 Total Current Liabilities 328,489 317,729 366,568 270,662 270,662 183,335 224,107 224,647 Long Term Debt 0 0 0 0 Provisions for Risks & Charges 0 0 0 0 Deferred Taxes 0 0 0 0 0 0 0 0 Termination benefit obligations 0 0 0 0 Non-Equity Reserves 0 0 0 0 Other Liabilities 0 0 0 0 0 0 0 0 Total Non-current Liabilities 0 0 0 0 0 0 0 0 Total Liabilities 328,489 317,729 366,568 270,662 270,662 183,335 224,107 224,647 Reserves 40,847 105,214 172,418 193,333 193,333 193,333 193,333 193,333 Minority Interest 7,509 18,271 299 126 126 126 126 126 Preferred Stock 0 0 0 0 0 0 0 0 Common Equity 0 0 95 95 95 353,747 544,716 789,971 Common Stock 0 0 95 95 95 128 128 128 Additional paid-in capital 0 0 0 0 0 247,554 247,554 247,554 Other Appropriated Reserves 0 0 0 0 0 0 0 0 Retained Earnings 0 0 0 0 0 106,065 297,034 542,288 Treasury Stock 0 0 0 0 0 0 0 0 Total Equity 48,356 123,485 172,812 193,554 193,554 547,206 738,175 983,430 Total Liabilities & Shareholders' Equity 376,845 441,214 539,380 464,216 464,216 730,542 962,283 1,208,077
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 29: Cash flow RMB'000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Net Income/Starting Line 50,919 93,812 57,842 28,796 86,638 120,528 209,856 288,534 Depreciation, Depletion & Amortization 1,006 1,878 5,037 5,193 10,230 11,354 14,290 13,799 Depreciation & Depletion 1,006 1,878 2,515 2,670 5,185 6,309 9,245 8,754 Amortization of Intangible Assets 0 0 2,522 2,523 5,045 5,045 5,045 5,045 Deferred Income Taxes & Investment Tax Credit 0 0 0 0 0 0 0 0 Equity in income of an equity method investee 0 0 0 0 0 0 0 0 Deferred tax expense 0 0 0 0 0 0 0 0 Gains/Loss On Disposal Of Assets 0 6 0 0 0 0 0 0 Bank interest income (336) (1,402) (176) (214) (390) (1,134) (2,462) (3,946) Provisions for impairment 0 Financial cost 1,062 6,226 4,017 3,088 7,105 3,132 3,132 3,132 Foreign exchange gain and loss – net (555) 3,145 1,978 2,131 4,109 0 0 0 Operating profit before change in working capital 52,096 103,665 68,698 38,994 107,692 133,880 224,817 301,520 Funds from/for Other Operating Activities 26,340 (36,515) (22,379) (26,165) (48,018) (80,862) (59,657) 8,309 Dec(Inc) In Receivables (8,932) (27,984) (79,439) 39,169 (40,270) (162) (44,316) 117 Dec/(Inc) In Inventories (149,085) 48,409 6,653 47,460 54,113 (43,373) (56,113) 7,653 Inc(Dec) In Accounts Payable 7,546 11,091 97,334 (53,178) 44,156 (7,327) 40,772 540 Dec(Inc) in Prepayments, Deposits and Others 18,541 29,572 7,453 (10,237) (2,784) 0 0 0 Dec(Inc) in Amounts Due from Related Parties (11,402) (38,658) 0 0 0 0 0 Inc(Dec) in Other Payables 2,095 26,754 (8,747) 257 (8,490) (30,000) 0 0 Inc(Dec) in Advances from Customers 167,577 (85,699) (45,633) (49,110) (94,743) 0 0 0 Inc(Dec) in Amounts Due to Related Parties 0 0 0 0 0 0 0 Dec/(Inc) In Other Assets (526) 0 0 0 Taxation (Cash Flow) (873) (15,415) (8,741) (5,127) (13,868) (14,463) (18,887) (43,280) Interest received 336 1,402 176 214 390 1,134 2,462 3,946 Cash from Operating Activities 77,899 53,137 37,754 7,916 46,196 39,689 148,734 270,495 Capital Expenditures Additions to Fixed Assets (50,013) (33,447) (6,711) (3,534) (10,245) (48,936) (21,000) (21,000) Purchase of intangible assets 0 0 (20) 0 (20) 0 0 0 Dec(Inc) in payments in advance (39,808) (8,220) (14) (21,385) (21,399) 0 0 0 Acquisition of subisdiaries (5,000) (8,000) (8,000) 0 0 0 Acquisition of non-controlling interests (14,000) 0 (14,000) 0 0 0 Proceeds from disposal of items of PP&E 0 0 0 0 0 0 Cash from Investing Activities (89,821) (41,628) (25,745) (32,919) (53,664) (48,936) (21,000) (21,000) Bank Loans 122,011 414,695 122,619 136,263 258,882 (50,000) 0 0 Proceeds From Sale/Issue of Com & Pref 0 0 247,588 0 0 Capital contribution from the subsidiary 0 0 0 0 0 0 0 0 Capital contribution from a non-controlling subsidiary 300 0 0 0 0 0 0 0 Reduction In Long Term Bank Loans (70,002) (377,518) (143,816) (129,977) (273,793) 0 0 0 Inc(Dec) In Amounts from/due to related party (25,000) (11,173) 18,948 6,685 25,633 0 0 0 Com/Pfd Purchased, Retired, Converted, Redeemed (6,685) (6,685) 0 0 0 Other Sources - Financing 0 0 0 0 0 Common Dividends (Cash) 0 (5,000) 0 0 0 0 0 0 Interest paid (1,062) (6,703) (4,017) (3,088) (7,105) (3,132) (3,132) (3,132) Cash from Financing Activities 26,247 14,301 (6,266) 3,198 (3,068) 194,456 (3,132) (3,132) Net Change in Cash 14,325 25,810 5,743 (21,805) (10,536) 185,210 124,602 246,363 Effect of Exchange Rate on Cash/Cash Equivalent 61 (49) 155 371 526 0 0 Net Cash - Beginning Balance 30,069 44,455 70,216 76,114 70,216 60,206 245,416 370,018 Net Cash - Ending Balance 44,455 70,216 76,114 54,680 60,206 245,416 370,018 616,381
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 30: Ratios 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Operating Profit Margin % 9.2% 11.1% 10.9% 8.2% 9.7% 9.3% 12.1% 13.4% Tax Rate % 15.6% 14.6% 15.8% 28.0% 19.8% 12.0% 9.0% 15.0% Net Margin % 8.1% 8.4% 8.0% 4.3% 6.3% 7.5% 10.5% 11.1% Return on Assets % 11.4% 18.2% 9.0% - 15.0% 14.5% 19.8% 20.3% Return on Equity - Total % 88.9% 64.9% 28.2% - 35.9% 19.4% 25.9% 24.9% Return on Investment Capital 38.6% 37.2% 19.8% - 25.2% 18.3% 24.8% 24.2% Total Asset Turnover 2.1x 2.3x 2.3x - 2.4x 2.4x 2.1x 2.0x Capex as % of sales 9.4% 3.5% 1.1% 0.7% 0.9% 3.5% 1.2% 0.9% Acc Depreciation % Gross Fixed Assets 2.0% 3.0% 5.3% - 7.8% 9.4% 13.6% 16.6% Current Ratio .8x .9x .8x .8x .8x 2.4x 3.0x 4.1x Quick Ratio .4x .6x .6x .6x .6x 2.0x 2.4x 3.4x Book Value per Share 0.04 0.10 0.14 0.16 0.16 0.34 0.46 0.61 Net Debt/Equity 72.5% 27.3% 5.4% 22.6% 22.6% Net Cash Net Cash Net Cash
Source: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Company Profile
Company Overview
3rd largest MPCMS provider in China. Sinco is one of the largest Marketing, Promotion and Channel Management (MPCM) Services provider in China with a market share of 6.4% in terms of revenue in 2014. The company is also the sole MPCM provider for plasma-based pharmaceuticals in China. Founded in Chengdu in 2011, Sinco is similar to the business model of other MPCM providers, which generates profit by purchasing products from domestic or overseas suppliers and on-selling them to distributors across China. Under this business model, Sinco books its sales to distributors as revenue while taking the COGS as purchasing prices from the suppliers.
Figure 31: MPCM market share (2014) Figure 32: Business model Sinco Pharma China Medical 6.4% Manufacturers Hospital level System 19.7% Pioneer Pharma product information 10.3% Sinco Pharma
Eddingpharm Physicians 5.3% generate demand NT Pharma clinical promotions 5.8% Distributors, Sub-Distributors fulfill demand Hospital Others 52.5% Information Patients Products Source: Frost & Sullivan, CMS (HK) Source: Company, CMS (HK)
Sinco is focusing on small/medium-sized suppliers. Sinco offers integrated services to small/medium sized overseas pharmaceutical companies to have a quick and in-depth access to China’s pharmaceutical market. Under this business model, company sources products from international suppliers to domestic market with value-add services, includes formulating and executing both marketing and promotion strategies as well as providing channel management on logistics and tender process.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Ample coverage across China. Sinco deploys c.191 external distribution representatives to leverage their specialties to cover more than 3,000 hospitals and medical institutions across China, including over 927 class III hospitals; 1,180 class II hospitals; over 357 class I hospitals and over 715 pharmacies and other medical institutions as of FY15. By the end of FY15, majority of the distributors were located in southeast China and contributed c.55% of the total revenue during the period.
Figure 33: Extensive network through distributors Figure 34: Hospital coverage (end of 2015)
Class III Class II 927 1,180
Class I and others 1,072
Source: Company, CMS (HK) Source: Company, CMS (HK)
Sinco is well-positioned to ride on the fast growing plasma industry. Sinco is well-positioned to capture the great potential of the fast growing plasma industry, which has better chance to quickly expand its footprints and gradually narrowing the gap with well-established companies such as CMS (867 HK). It is also worth mentioning that, Sinco is the only MPCM provider to import human albumin with asset-light business model in China, while other major companies are asset-heavy with internal marketing teams, such as CSL Behring (CSL AU). This greatly boosts efficiency to the company with significantly better SG&A management compared with industry peers.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Products
Figure 35: Product summary National Provincial National Provincial Product Product Country of Geographic Insurance Insurance Essential Essential Name Category Product Use Supplier Manufacture Terms Coverage Expiry Date Catalogue Catalogue Drug Drug Human Solution for To remedy blood loss caused by Octapharma AG Austria From 29 China nationwide, 28-Mar-2018 Class II Class II - All – Anhui, Jilin, Albumin infusion trauma or burns, abnormally high November except Shanghai provinces and Solution intracranial pressure, edema and 2012 to an and the provinces Guangdong ascites, and to prevent and cure indefinite of Shandong, low-density lipon-proteinemia and period Jiangsu, Zhejiang, reonatal hyper-bilirubinemia (subject to Anhui, Fujian and annual price Jiangxi negotiations) Axetine Antibiotics Treatment for bacterial infections Medochemie Ltd Cyprus From 20 April China nationwide 20-Feb-2019 Class I Class I Yes – 2011 to an indefinite period
Medocef Antibiotics Treatment for bacterial infections Medochemie Ltd Cyprus From 20 April China nationwide 4-Jun-2020 – Class II: – Anhui, 2011 Shanghai, Qinghai, to an Jiangsu, and Jilin indefinite Guangdong, period Qinghai, Shanxi, Inner Mongolia, Anhui, and Zhejiang Taurolite Gastroenter Treatment of hepatobiliary Bruschettini Italy From China nationwide 14-Jul-2020 – Class II: – – ology diseases, including gallstone S.r.l. January 2014 Liaoning, diseases, or cholelithiasis to March Jiangxi, 2023* Hubei, Inner Mongolia, Guangxi, Gansu, Henan, Ningxia, Jiangsu, and Yunnan
TAD Gastroenter Treatment and prophylaxis of Biomedica Italy From China nationwide 10 February Class II Class II - All – Anhui, Jilin, ology intoxications from ethyl alcohol, Foscama January 2014 2015** provinces Jiangxi, organophosphorus and several Industria to March 18 March Shanxi, groups of drugs, as well as cell Chimico 2023* 2015** Xinjiang, damages and liver damages Farmaceutica Shanghai, S.p.A. Guangdong, Sichuan, Yunnan, and Chongqing Esafosfina Cardiology Treatment of hypophosphatemia Biomedica Italy From China nationwide 4-Jan-2020 Class II Class II - All – Anhui, Jilin, and chronic diseases including Foscama January 2014 provinces Shanghai, alcohol intoxication, malnutrition Industria to March Guangdong, and hypophosphatemic Chimico 2023* and respiratory failure Farmaceutica Chongqing S.p.A.
Xinneng Q10 Dietary Enhance immunity system Liaoning Wanjia China From China nationwide 29-Sep-2016 – – – – supplement Pharmaceutical October 2015 Technology Co., to December Ltd. 2025 Source: Company
Note*: The company purchased the relevant product from Trendful through Vast Surplus and provided services to the product in 2014, then entered into distribution transfer agreements in 2015 for Taurolite, TAD and Esafosfina.
Note**: The company submitted the import drug licenses to renew the product registration for TAD on 9 September 2014, approximately six months before the expiry date of TAD’s last imported drug licenses until CFDA decided to conduct specification validation and verification for TAD on Nov 2015. During the application process, the company obtained two temporary Import Drug Approval Notices on 15 March 2015 and 2 April 2015, respectively, for two shipments of TAD during the application period, and the company has not imported TAD since then. Currently Sinco has sold out all TAD with no more inventory on hands. It is expected that the product to obtain the licenses by the end of 1H16, according to the company.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Plasma-based pharmaceutical product – Human Albumin Solution
Human albumin is primarily used for clinical emergency. Human Albumin Solution is used to remedy blood loss caused by trauma or burns, abnormally high intracranial pressure, edema and ascites, and to prevent and cure low- density lipo-proteinemia and neonatal hyper-bilirubinemia. It is also the only human albumin product that can be used on newborns and infants with hypoalbuminemia due to it has low aluminium-ion content. Human albumin products accounted for a majority the plasma market in China, which is c.40% larger than the albumin products market in the United States, according to The Marketing Research Bureau, Inc (MRB). This was mainly driven by the high incidence rate of hypoalbuminemia from liver cirrhosis and hepatitis B in China. Human albumin is included in the Class II of the National Insurance Catalogue.
Figure 36: China consumes much more Albumins Figure 37: …compared with matured market such
(in 2014)… as U.S during the same period
Human Others, 19% Albumin, 12%
IVIG, 42%
Human Albumin, 56% IVIG, 25% Others, 46%
Source: Frost & Sullivan, CMS (HK) Source: CMS (HK)
Sinco has been the sole service provider of human albumin manufactured by Octapharma to 24 provinces since November 2012. Sales of human albumin was RMB252mn/629mn in FY13/14 (+151% YoY), and accounted for 3.5%/7.3% of all human albumin product sales in China. Sinco recently entered into a supplemental agreement with Octapharma to ensure better margin on a reasonable basis and increase the total import volume of human albumin starting from 2015 to 2019, showing its increasing bargaining power to Octapharma after doubling the market share by revenue in 2014.
Sinco has established a long, stable and close partnership with Octapharma. In November 2012, Sinco obtained a 12-year exclusive right till 2024 to distribute human albumin products in 24 provinces across China, and the contract period renewed to indefinite term in 2015. Octapharma also engaged Huadong Medicine through its subsidiary Huadong Medicine Ningbo, to distribute its human albumin product in the rest of the 7 provinces. Currently Sinco contributed over 75% of Octapharma’s sales of its human albumin product in China in 2014, increasing from 36.0% in 2013. The company also more than doubled its market share in China’s human albumin market from 3.5% in 2013 to 7.3% in 2014.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 38: Human albumin usage per capita Figure 39: Sinco’s human albumin revenue and
comparison (kg per mm inhabitants, in 2014) growth (RMB mn) 600 Human Albumin YoY 1,600 160.0% 151% 459 1,400 140.0%
Thousands 1,200 120.0% 400 1,000 100.0%
800 80.0%
200 600 60.0% 149 400 40.0% 31% 35% 200 17% 20.0% 6% 0 0 0.0% China United States 2013A 2014A 2015A 2016E 2017E 2018E Source: CMS (HK) Source: Company, CMS (HK) estimates
Our channel check suggests the growing supply of human albumin has yet to meet the increasing demand. In China, the demand for plasma-based pharmaceuticals exceeds its supply, resulting in a growth rate higher than the overall healthcare industry and the global plasma-based pharmaceuticals market. We cast our channel check by looking into the annual sales of major manufactures human albumin products in class II and above hospitals, which suggests that the growing supply from both domestic and overseas has yet to meet the overall demand in China.
Figure 40: Annual sales trend of Human Albumin
in class II and above hospitals in China (RMB mn)
2012A 2013A 2014A 2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0 CSL Behring Grifols Baxter CBPO Hualan Bio Source: IMS database, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Antibiotics products – Axetine and Medocef
Axetine (Cefuroxime Sodium for Injection)
Axetine is an injectable cefuroxime sodium product manufactured by Medochemie. Axetine is an essential drug included in the National Insurance Catalogue (Class I) for the treatment of bacterial infections, and is one of the most popular cefuroxime sodium products in China with a market share of c.27% by revenue in 2014. Axetine has relatively higher safety, lower adverse effect, and better efficacy to wide spectrum of anti-bacteria with strong antibacterial activity as well as tissue penetrance capabilities compared with products from peers, based on our channel check.
Sinco become the exclusive service provider for Axetine in China since April 2011. Sinco sold 21.7mn/16.9mn bottles of Axetine through 123/127 distributors in 23/26 provinces in FY14/10M15 and generated revenue of RMB26mn/238mn/258mn/259mn in FY12-15. We estimate Axetine to grow at 3% in FY16E/17E, respectively, which is mainly driven by the growth in volume. Meanwhile, we expect stable ASP in the upcoming years as we believe the drug is relatively more defensive to the price erosion from the tendering, thanks to the low price strategy that the current selling price is well below the tendering price, which is poised for better penetration in the new markets.
Our channel check shows the growing trend of cefuroxime has peaked in 2013. We cast our channel check by looking into the annual sales of major manufactures cefuroxime in class II and above hospitals, which suggests that both domestic and imported cefuroxime products have peaked out in 2013. This is in-line with the stringent policy control over the use of antibiotics starting 2012, and we expect the trend to continue over the upcoming years.
Figure 41: Sinco’s Axetine revenue and growth Figure 42: Annual sales trend of cefuroxime in class
(RMB mn) II and above hospitals in China (RMB mn)
Axetine YoY 2012A 2013A 2014A 280 9.0% 700 8% 8.0% 270 600
7.0% Thousands 6.0% 500 260 5.0% 400 250 4.0% 300 3% 3.0% 240 200 2% 2.0% 1.0% 100 230 0.0% 0% 0% 0 220 -1.0% Medochemie Shenzhen Chung-Hwa Shenzhen Shenzhen 2013A 2014A 2015A 2016E 2017E 2018E (Cyprus) Lijian Pharma Pharma Zhijun Pharma Salubris Source: Company, CMS (HK) estimates Source: IMS data, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Medocef (Cefoperazone Sodium for injection)
Medocef is a cefoperazone sodium for injection, another antibiotics product manufactured by Medochemie. It is used for bacterial infections, including infections of the lower respiratory tract such as pneumonia, urinary tract, bile duct, peritoneum, skin, soft tissue, pelvic area and sepsis. The product was included in 8 Provincial Insurance Catalogues (class II). Medocef had a market share of 0.8% based on revenue in China in 2014.
Similar to Axetine, Sinco acts as the exclusive service provider for Medocef in China since April 2011. Sinco sold 4.2mn/3.9mn bottles of Medocef through 61/51 distributors in 15/18 provinces in FY14/10M15 and generated revenue of RMB49mn in FY14 and RMB59mn in FY15. We estimate FY16E/17E growth of 3%/2%. The robust growth in FY15 is mainly driven by the volume boost due to the low base in FY14. Meanwhile, similar to Axetine, we expect stable ASP in the upcoming years as we believe the drug is relatively more defensive to the price erosion from the tendering, thanks to the low price strategy that the current selling price is well below the tendering price, which is poised for better penetration in the new markets.
We learnt that cefoperazone is growing at single digit on average during FY12-14. We cast our channel check by looking into the annual sales of major manufactures cefoperazone in class II and above hospitals, which suggests that cefoperazone products have been growing at single digit over the past three years. Similar to the cefuroxime market, the sluggish growth is partially result from the stringent policy control over the use of antibiotics starting 2012, and we expect the trend to continue over the upcoming years.
Figure 43: Sinco’s Medocef revenue and growth Figure 44: Annual sales trend of cefoperazone in
(RMB mn) class II and above hospitals in China (RMB mn)
Mercedof YoY 2012A 2013A 2014A 70 25.0% 600
60 500 20.0%
Thousands 19% 50 400
15.0% 40 14% 300 30 10.0% 200 20 100 5.0% 10 3% 2% 0 0 0% 0.0% Hainan General Haikou Hainan General Shandong Luoxin Sanyang Qili Sanyang 2013A 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates Source: IMS data, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Other products – Taurolite, TAD, Esafosfina and Xinneng Q10
Taurolite
Taurolite is a tauroursodeoxycholic acid (TUDCA) manufactured by Bruschettini. Taurolite is used for the treatment of gallstone diseases, or cholelithiasis, a prevalent disease in China with incidence rate of 7% and rising, due to change in lifestyles and dietary. Taurolite is the 3rd generation oral cholic acid drug that contains tauroursodeoxycholic acid, which is more water solvent and more efficient on dissolving cholesterol than previous two generations of oral cholic acid drugs (UDCA). Currently there are no direct competing products under the same generic name for Taurolite, making it the only 3rd generation of oral cholic acid drug currently available in China.
The oral cholic acid drug market is currently dominated by Ursofalk. Ursofalk, the most popular UDCA product, is originated from Dr. Falk Pharma in Germany and under CMS’s (867 HK) sales network, currently the best-selling ursodeoxycholic acid drug in China, ranked 1st in sales of digestive products with market share of c.78% in the Chinese cholagogue market. Besides Ursofalk, over 40 pharmaceutical companies have UDCA licenses, including subsidiaries of Shanghai Pharm (02607 HK) and Guangzhou Baiyunshan (874 HK).
We expect TUDCA to gradually take up the market share of UDCA. Taurolite is currently included in 10 Provincial Insurance Catalogues with a market share of c.9.8% in the oral cholic acid drugs market. TUDCA drug is expected to take up a larger share of the oral cholic drug market in the upcoming years, which mainly attributable to: 1) better water solvent and efficiency; and 2) low price strategy.
Figure 45: Sinco’s Taurolite revenue and growth Figure 46: Market share of oral cholic acid drugs in
(RMB mn) China in 2014
Taurolite YoY Daewoong Pharma Others 450 1600% 9.6% 2.5%
400 1400% 1358% 350 Bruschettini Thousands 1200% 9.8% 300 1000% 250 800% 200 Losan Pharma 600% 150 78.1% 400% 100
50 200% 80% 45% 0 70% 0% 2014A 2015A 2016E 2017E 2018E Source: Company, CMS (HK) estimates Source: Frost & Sullivan, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 47: Difference between TUDCA vs. UDCA and CDCA TUDCA (3rd generation) UDCA (2nd generation) CDCA (1st generation) Bioavailability Higher Lower Lower Hydrophile Better Good, but not as hydrophilic as Good, but not as hydrophilic as TUDCA TUDCA Time to take effect Faster Slower, compared with TUDCA Slower, compared with TUDCA Safety Lower toxicity, less hemolytic May cause lithocholic acid result of May cause lithocholic acid result of activity, no gastric mucosal lesion, calcification, higher toxicity calcification, higher toxicity less lithocholic acid and better compared with TUDCA compared with TUDCA safety Indication Stone Dissolution Stone Dissolution Stone Dissolution Cholestasis Cholestasis Cholestasis Bile Reflux Gastritis Bile Reflux Gastritis Bile Reflux Gastritis Alzheimer Parkinson Disease Age-related macular degeneration Absorption Active absorption in the terminal Passive absorption in the upper Passive absorption in the upper ileum ileum ileum Inhibition of cholesterol synthesis Better Good Good Increase secretion of bile acids Effective Effective Effective External cholesterol absorption Greatly reduced Reduced Reduced Possibility to cause hemolysis Very low Medium High Gastric mucosal damage No damage Less damage Severe damage Effective rate in stone dissolution 70%* 54%* n.a Bioactivity Bioactive drug Inactive prodrugs Inactive prodrugs Costs RMB310-330 (20 capsules/box) c.RMB280 (25 capsules/box)** c.RMB70 (24 capsules/box)
Source: CMS (HK) * Source from: Ventura P, Girola M, et al. Act Toxicol Ther 7:213,1996 **: We use Ursofalk as a comparison
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
TAD
TAD is reduced glutathione for injection, manufactured by Foscama. It is used for the treatment and prophylaxis of intoxications from ethyl alcohol, organophosphorus and several groups of drugs (anticancer chemotherapeutic agents, antitubercular drugs, neuroleptics, antidepressants and acetaminophen), as well as cell damage from ionising radiations and liver damage. Reduced glutathione protects the liver by reducing the activity of free radicals in the liver, as well as strengthening the detoxification ability of the liver. TAD is included in the National Insurance Catalogue (class II) and had a market share of c.1.1% by revenue in 2014.
Sinco acts as the exclusive service provider for Foscama in China since January 2015. The company entered into distribution transfer agreements for the exclusive service right of TAD for a term of 9 years starting January 2015. The company sold 308,000 bottles and 1.4mn bottles of TAD in FY14 and 10M15, respectively, through Guangzhou Pharmaceuticals in 31 provinces in China. It is worth noticing that Sinco strategically lowered the ASP of TAD to distributors in FY15 due to: 1) a noticeable decrease in the cost of the TAD as a result of acquisition of the exclusive right to service TAD in China in March 2015; 2) in exchange for its distributors to take up part of the marketing and promotion expenses for TAD; and 3) plans to expand market shares.
Sinco is currently pending on the license renewal process from CFDA. The company submitted the application to renew the import drug licenses for TAD on 9 September 2014, approximately six months before the expiry date of TAD’s last imported drug licenses. During the application process, CFDA requests additional materials for specification validation and verification purposes. The company obtained two temporary Import Drug Approval Notices on 15 March 2015 and 2 April 2015 for two shipments of TAD during the application period, and the company has not imported TAD since, and currently all of the TAD is sold out with no more inventory on hands. It is expected that TAD to obtain the licenses by the end of 1H16, according to the company. Our model only factored in c.3 months’ contribution in FY16E in case of further delay in granting the licenses from the government.
The reduced glutathione market is growing steadily during FY12-14. Our channel check suggests that other market player such as Chongqing Yaoyou and Fudan Forward Pharma, the annual sales in class II and above hospitals are growing steady during FY12-14, according to data from IMS. The market for reduced glutathione products in China grew at a CAGR of 19.8% from 2010 and 2014 and had total sales of RMB2,660mn in 2014, according to Frost & Sullivan report.
Figure 48: Sinco’s TAD revenue and growth Figure 49: Annual sales trend of glutathione in class
(RMB mn) II and above hospitals in China (RMB mn) 1,000 TAD YoY 2012A 2013A 2014A 35 250% 900 800 30 212%
200% 700 Thousands 25 600 150% 20 500
400 15 100% 300
10 200 50% 39% 100 5 39% 20% 0 0 0% Chongqing Fudan Forward Kunmin Jida Luye Pharma Italy 2014A 2015A 2016E 2017E 2018E Yaoyou Pharma Pharma Pharminvest Source: Company, CMS (HK) estimates Source: IMS data, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Esafosfina
Esafosfina is used for hypophosphatemia and chronic diseases, such as alcohol intoxication, malnutrition and hypophosphatemic respiratory failure. Manufactured by Foscama, Esafosfina is currently the only imported injectable fructose 1,6-diphosphate approved by the CFDA. Clinical studies demonstrated that Esafosfina significantly improves respiratory functioning for pneumonia and reduced the likelihood of heart failure in children, which effectively treating liver damage for patients with viral hepatitis and vertebrobasilar ischemia. Esafosfina is included in the National Insurance Catalogue (class II) with market share of c.3% by revenue in 2014.
Sinco acts as the exclusive service provider for Foscama in China since January 2015. Similar to the TAD story, the company entered into distribution transfer agreements for the exclusive service right of Esafosfina for a term of 9 years starting January 2015. Sinco sold 69,000/51,360 bottles of Esafosfina nationwide in FY14 and 10M15, respectively, mainly through Guangzhou Pharmaceuticals (since 2014) and Kelun Pharmaceuticals (since 1H15) in 31 provinces in China.
We saw stagnant growth of injectable fructose 1,6-diphosphate during FY12-14. Our channel check suggests that except Cisen Pharma, the annual sales growth trend in class II and above hospitals from other market player was declining during FY12-14, according to data from IMS. On the other hand, Frost & Sullivan report indicates that the market for Esafosfina in China grew at a CAGR of 19.8% from 2010 to 2014 and had total sales of RMB640mn by the end of 2014, and it is expected to grow at a CAGR of 13.5% from 2015 to 2019 and reaching RMB1,194mn.
Figure 51: Annual sales trend of injectable fructose Figure 50: Sinco’s Esafosfina revenue and growth 1,6-diphosphate in class II and above hospitals in (RMB mn) China (RMB mn) 160 Esafosfina YoY 2012A 2013A 2014A 70 180% 140
160% 160% 120 60 151%
140% Thousands 50 100 120% 80 40 100% 60 30 80% 60% 40 20 40% 50% 40% 20 10 20% 0 0 0% Cisen Pharma Huajin Pharma Hainan Hainan Anhui Piom 2014A 2015A 2016E 2017E 2018E Chang'an Huanglong Source: Company, CMS (HK) estimates Source: IMS data, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Xinneng Q10
Xinneng Q10 is an oil-soluble antioxidant essential for basic cell functions. Xinneng Q10 is composed of Coenzyme Q10, an oil-soluble antioxidant essential for basic cell functions and is especially abundant in liver, kidney and pancreas. Coenzyme Q10 can be used as a dietary supplement or as a drug. Xinneng Q10 facilitates the energy exchange in mitochondria within cells and clears the free radicals in cells, which improved heart and liver functions, alleviation of post-chemotherapy adverse effects and prevention of complications from diabetes and kidney failures; Alzheimer’s disease and Parkinson’s disease, according to the research studies. Sinco entered into a collaboration agreement with Liaoning Wanjia to be the exclusive service provider in China for Xinneng Q10 from October 2015 to December 2025, registered as a dietary supplement with the CFDA, which is not included in any of the Insurance Catalogues or the EDL.The product has launched and start contributing revenue in December 2015.
The market is currently dominated by Neuquinon from Eisai. Eisai Co., Ltd., with its product Neuquinon, and Southwest Pharmaceutical Co., Ltd, with its product He Fu, are top two market players in the Coenzyme Q10 market in China (as a drug) by revenue in 2014, with a market share of 77.4% and 15.1%, respectively.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Pipeline product – Coagulation Factor VIII and Sinco I
Coagulation Factor VIII
Factor VIII is used for treatment of coagulopathies such as hemophilia and increased concentration of coagulation factor VIII. Factor VIII has great market potential as it is currently extremely under-supplied and only been used for urgent medical treatment for patients with hemophilia in China, while the product is widely used to improve vitality and lifespans in the U.S. and other mature markets.
Factor VIII market is still nascent with strong growth potential. There were over 10,000 registered patients of hemophilia in China by the end of 2015, according to China Hemophilia Association, which underpins a significant market demand for factor VIII products. However, only few domestic players are capable of manufacturing plasma- derived factor VIII in China, Hualan Biological (002007.CH) is the market leader with c.42% market share (excl. recombinant factor VIII products) in terms of sales volume in 2014.
Recombinant factor VIII has taken a growing role in hemophilia care in China. This is due to an acute shortage of plasma-derived coagulation factor concentrates available in China as a result of limited coagulation factor manufacturers. Bayer is the major producer for recombinant factor VIII and currently with c.25% market share in China. However, since recombinant products are c.3x more expensive than plasma-derived factor VIII products and not covered by NDRL for full reimbursement in China, they are only used in the absence of suitable plasma-derived products, according to industry practise. We expect the current unmet demand for both plasma-derived as well as recombinant factor VIII products will likely to persist in the foreseeable future.
Octapharma has successfully tapped into the recombinant market in 2014. Octapharma reached a major milestone in 2014 that entered into the recombinant market when Nuwiq became the first recombinant factor VIII from a human cell line to be approved in Europe, according to Octapharma 2014 annual report. We expect this to be the game changer for Sinco if the company could leverage the relationship to tap into this nascent market, which will potentially reshuffles the industry.
Figure 53: Factor VIII usage per capita in 2012 Figure 52: Factor VIII (Nuwiq) by Octapharma (international unites per inhabitants) 10
8 7.6
6
4
2
0.2 0 China United States Source: Octapharma annual report 2014, CMS (HK) Source: The Marketing Research Bureau, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Sinco I
Sinco I is a realgar-based chemical medicine intended to treat Acute Promyelocytic Leukaemia (APL). Sinco entered into technical consultancy service agreements with Institute of Chinese Medical Sciences and Tsinghua University to develop and test Sinco I starting November 2013. The product is derived from the ore realgar, which is composed mainly of the compound tetraarsenic tetrasulfide (As4S4) that has been indicated for the treatment of acute promyelocytic leukaemia. Sinco I is classified as a class I chemical medicine, a category of new medicine which has never been launched in China or other countries.
APL is a unique subtype of acute leukaemiahas with high incident rate. APL in China accounted for up to 21.2% of all cases of acute leukaemia in 2014, a major subcategory of leukaemia, and leukaemia was ranked 10th in terms of incidence rate among all cancers in China, according to the Frost & Sullivan report.
Sinco I is currently in the pre-clinical research phase. The product is expected to complete its pre-clinical research and pilot experiments by the end of 2016 and apply for permission to begin clinical trials in 2017, which is expected to complete by 2022, according to the company. It is worth mentioning that Sinco is not directly engaged in this research and development process. They will sponsor the process, including experimentation, clinical trials and preparation of registration. In return, Sinco possesses rights to any technical achievements resulting from the work, including the rights to patent the achievements.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Suppliers – Case Study of Octapharma
Octapharma is one of the largest plasma-based manufacturers in the world. Octapharma focuses on manufacturing, and sale of products in the following three therapeutic areas: 1) haematology, such as blood coagulation factors (factor VIII and IX) for treating bleeding disorders and hemophilia disease; 2) critical care, which includes human plasma and protein products for treating critically ill or injured patients; and 3) immunological diseases, includes immune globulin for treating immunological diseases and immunodeficiency. The company had 9.6% market share in human albumin market in China in 2014.
Figure 54: Human albumin product by Octapharma Figure 55: Historical revenue growth (EUR mn)
Total Revenue YoY 1,600 30% 26.0% 1,400 25.1% 1,200 20% 1,000 18.2% 800
600 10.9% 10% 400
200 2.0% 0 0% 2011A 2012A 2013A 2014A 2015A
Source: Octapharma annual report 2014, CMS (HK) Source: Octapharma annual report 2015, CMS (HK)
Sourcing new plasma supply worldwide to fullfil global demand. Octapharma procures a significant percentage of its plasma from company-owned plasma donation centres in the U.S. and Germany, based on our channel check. Its U.S. facility opened a state-of-the-art plasma testing laboratory and storage facility as well as six new plasma collection centres in 2014, and it is expected to open several more centers in 2015. In 2014, the company’s Germany premises underwent a renaming and rebranding process, which poised for opening more centres in the near future.
Sinco has established a long, stable and close partnership with Octapharma. Sinco obtained the exclusive right for an indefinite term to distribute human albumin products in 24 provinces across China, subject to annual price negotiations. Octapharma also engaged Huadong Medicine, another pharmaceutical distributor that unaffiliated with Sinco, through its subsidiary Huadong Medicine Ningbo, to distribute its human albumin product in the rest of 7 provinces. Currently Sinco contributed over 75% of Octapharma’s sales of its human albumin product in China in 2014, increasing from 36% in 2013. The company also more than doubled its market share in China’s human albumin market from 3.5% in 2013 to 7.3% in 2014.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
New source of supply to boost volume growth. Currently all the human albumin products from Octapharma came from its Vienna facility, and it is expected to gradually reach its full capacity by FY16. Octapharma has already assinged another station located in Stockholm to fullfil the increasing demand from China. The albumin product from this facility will under a new brand name and the registration process has been completed in 1H15, and it is expected to commence exporting in 1H16, according to our channel check.
Octapharma entered into the exponential growth phase with +90%/+40% bottom-line increase in FY14/FY15. Revenue was EUR1.5bn in FY15, +18% YoY compared with EUR1.3bn in FY14, which was mainly driven by: 1) additional donation centres in the U.S. and Europe which makes Octapharma increasingly self-sufficient in the plasma sourcing; and 2) better sales in North American region, the Middle East and certain European markets. Gross profit margin expanded to 38.5% during the period, which represents a significant improvement compared to previous years. Net profit came in at EUR330mn, +40% YoY owing to the optimized efficiencies (cost control as well as processes optimizing), according to Octapharma 2015 annual report.
Figure 56: Margin trend Figure 57: Historical net profit growth (EUR mn) 40% 38.5% Net Income YoY 34.6% 35% 350 100% 31.1% 89.8% 29.9% 88.3% 90% 30% 28.0% 27.1% 26.2% 300 80% 70% 25% 21.9% 250 60% 19.2% 18.6% 57.4% 20% 21.8% 200 50%
15% 18.5% 39.9% 40% 150 14.8% 30% 10% 9.8% 20% 10.8% 100 10% 5% 50 (8.4%) 0% 0% -10% 2011A 2012A 2013A 2014A 2015A 0 -20% Gross Margin EBITDA Margin Net Margin 2011A 2012A 2013A 2014A 2015A Source: Octapharma annual report 2015, CMS (HK) Source: Octapharma annual report 2015, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Customer – Case Study of Sichuan Kelun Pharmaceuticals Trading Ltd
Sichuan Kelun Pharma Trading (“Sichuan Kelun Pharma Trading”) is one of the key distributors to Sinco and previously held 15% interest to the Sichuan Sinco Pharmaceuticals Ltd, the principal operating subsidiary in China of the Company. Founded in 1998, the company primarily engaged in wide variety of drug wholesale business, including Chinese traditional medicine, chemical drugs as well as biologic products such as human albumin. Sinco and Sichuan Kelun Pharma Trading has entered into a long-term strategic cooperation with a term of 5 years until 2019, and Kelun Pharma Trading is one of Sinco’s major human albumin distributior in China.
Relationship between Sichuan Kelun Pharma Trading, Sichuan Kelun Industrial Group and Sichuan Kelun Pharma. Sichuan Kelun Pharma Trading is jointly owned by Mr. Liu Sichuan (0.2%); Mr. Cheng Zhipeng (1.8%); Sichuan Kelun Industrial Group (29.8%) and Sichuan Huifeng Investment (68.2%), respectively. Kelun Group was found in 1996 with 87 subsidiaries both domestically and abroad. Sichuan Kelun Pharma (002422 CH), the industrial arm of the Kelun Group, is primarily engaged in intravenous solutions, and currently one of the largest pharmaceutical company with wide selection of different products and packaging forms for intravenous solution in China.
Figure 58: Sichuan Kelun Pharma shareholding structure Sichuan Kelun Sichuan Kelun Pharmaceutical Industrial Group (002422 CH)
Liu Sichuan Cheng Zhipeng Sichuan Huifeng*
0.2% 1.8% 29.8% 68.2%
Sichuan Kelun Pharmaceuticals Trading Co., Ltd.
Source: Company *: Sichuan Huifeng is owned and controlled by the employees of Kelun Industrial and Sichuan Kelun Pharmaceutical Co., Ltd.
What we expect from the collaboration: 1) collaborate with leading pharmaceutical companies allows Sinco to leverage Kelun’s platform advantage to further develop business and distribution network as well as better inventory management; 2) long-term co-operation with key clients is one of Sinco’s advantages, benefitting the company with sustainable long-term growth prospects; and 3) the collaboration with reputable distributors such as Kelun, will gradually gain reputation for Sinco within the industry which could potentially draw more market shares from the peers, in our view.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Industry Overview
Marketing, Promotion and Channel Management (MPCM) Services Industry
The MPCM services, also known as Contract Sales Organizations (CSOs), provide assistant to pharmaceutical companies in introducing, distributing and marketing pharmaceutical products in China. The services typically include first-time product registration and renewals, promotion and marketing to hospitals and targeted physicians as well as channel management services. MPCM providers usually secure marketing, promotion and sales rights to designated pharmaceutical products in China from suppliers, and generate revenue from the sale of the products to its customer distributors, who then onsell the products to hospitals either directly or through sub-distributors. So MPCMs book its sales to distributors as revenue while taking the COGS as purchasing prices from the suppliers.
MPCM has been emerging over the last two decades. MNCs generally outsource their drugs sales when the drugs are mature and the patents expire, or in the territories where they have yet to establish their own sales teams. For example, in 2008, MSD cut 1,200 sales personnel and outsourced sales of Cozaar and Hyzza to InVentiv Health. MNCs have been continuously cutting their in-house sales teams over the recent years, owing to: 1) cost-saving pressure due to patent cliff; and 2) stricter regulatory scrutiny on drug promotions. Some small R&D-focused biotech companies with no in-house sales teams also prefer to use MPCMs for product launches. The global MPCM market has relatively small scale, given: 1) it has only been around for two decades, relatively new compared with other outsourcing market such as Contract Research Organization (CRO); and 2) different countries deploy slightly different approaches which require more flexibility and nimbleness in coping with market regulations, in our view.
Figure 59: Global MPCM market size (USD bn) Figure 60: Global MPCM market share in 2014 6.0 18% Global CSO Market Size YoY Others 16% 16% 26.0% Quintiles 5.0 15% 29.0% 14% 14% 13% 13% 4.0 12%12% 11% 10% 3.0 8% 8% PDI. Inc. 2.0 6% 4.0%
4% 1.0 Publicis 2% Touchpoint 10.0% United Drug 0.0 0% 17.0% InVentiv 2007 2008 2009 2010 2011 2012 2013 2014 14.0% Source: Capgemini Consulting Source: Sutherland Global Services http://www.capgemini-consulting.com/blog/accelerating-life- http://issuu.com/sutherlandresearch/docs/contract_sales_organ sciences-transformation/2013/05/disrupting-the-traditional- izations_market commercial-model The MPCM market in China proved to have similar business trends and opportunities as in the international market. Instead of building their in-house teams from scratch, several MNCs are collaborating with local MPCMs in China. Various local pharmaceutical companies, which have their in-house sales representatives, also seek to become MPCMs of MNCs, in order to enrich their product portfolios. For example, Pioneer Pharma (1345 HK) is the MPCM partner of Alcon for ophthalmic remedies, while Essex Bio (1061 HK) is the MPCM partner of Pfizer for ophthalmic remedies. Moreover, there are a few examples of R&D-focused companies with MPCM business. For example, NT Pharma (1011 HK) formed MPCM partnerships with Sanofi Pasteur and Fudan-Zhangjiang (1349 HK), primarily for the vaccines and Libod (Doxorubicin Liposome Injections) products, respectively.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
The MPCM market in China has been growing rapidly. The industry grew at a CAGR of 27.8% from 2010 to 2014 and is expected to expand at a CAGR of 25.2% from 2015 to 2019, according to Frost and Sullivan report. The two largest MPCMs in China are China Medical System (867 HK) and Pioneer Pharma (1345 HK), both of which focus on products manufactured by overseas companies. The MPCM market in China is more fragmented than global MPCM market, as the leading five companies only represent c.48% market share in the MPCM market in terms of revenue in 2014, according to Frost & Sullivan, versus c.75% by the top 5 global MPCM companies.
Figure 61: China pharmaceutical MPCM market size Figure 62: Market share of pharmaceutical MPCM (RMB mn) services in China
50,000 47,221 Sinco Pharma 2010-2014 2015E-2019E China Medical 6.4% 45,000 CAGR: 27.8% CAGR: 25.2% System 38,236 19.7% 40,000 Pioneer Pharma 35,000 10.3% 30,736 30,000 Eddingpharm 24,452 5.3% 25,000 19,238 NT Pharma 20,000 5.8% 14,960 15,000 11,826 9,654 10,000 7,764 Others 5,611 52.5% 5,000 0 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
The fragmented nature of China’s pharmaceutical industry provides a unique opportunity for MPCM market expansion. China currently has 6,000 pharmaceutical companies, of which only 15% have established in-house sales teams, and the rest rely heavily on agents. There are currently c.500,000 sales reps in China, and less than 20% of them are employed as in-house sales reps, with the rest self-employed or employed by agents. These agents are generally in small scale and loosely controlled by the manufacturers, and they work on a buy-and-sell basis in certain regions. We believe the unique approach of Sihuan Pharma (460 HK) to manage its agents (composed of c.20,000 sales reps) is a good example, indicating business transformation from the pharmaceutical agent model to the MPCM model.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Domestic pharmaceutical distributors are also taking the initiative to start participating in the MPCM market. Sinopharm (1099 HK) signed a cooperation agreement with AstraZeneca for the marketing and distribution of Betaloc in Jun 2014. We consider the cooperation a milestone for Sinopharm to expand into the MPCM business. In Oct 2014, Sinopharm and Pfizer launched the “County Hospital Program” to improve the medical capabilities of county hospitals, and help these hospitals to set up standardized Stoke Centers and Chest Pain Centers (CPC) in order to enhance their influence as a step of preparation for future drug marketing initiatives. We expect Sinopharm to become a major MPCM partner of Pfizer in the future, and the new business model may be considered an extension of its business to the upper stream of the supply value chain. Other pharmaceutical distributors are also developing MPCM businesses. For example, Huadong Medicine (000963 CH) is the MPCM partner for several local and overseas biopharmaceutical manufacturers, such as Octapharma for human serum albumin (HSA), and LG Life Sciences for Hyaluronic Acid (HA). Shanghai Pharma (2607 HK) is also developing its internal MPCM business unit. Shanghai Pharma has over 20 subsidiaries covering the entire value chain from manufacturing, distribution to retail, and has become one of the largest MPCMs of Pfizer in China for products such as Prevenar, an invasive disease prevention drug for infants. They recently introduced “integration of manufacturing and distribution strategy” to boost internal synergies, allocating more sales force from the distribution and retail subsidiaries to the manufacturing subsidiaries. We consider this as a great example of internalizing the MPCM model, and we will not be surprised to see other pharmaceutical companies follow suit. We believe MPCMs present notable business potential in China, and we believe: 1) key distributors are taking the initiatives to start participating in the MPCM market, such as Sinopharm (1099 HK); 2) Shanghai Pharm (2607 HK) has been developing its internal MPCM business unit; and 3) the unique approach taken by Sihuan Pharma (460 HK) implies business model transformation from the pharmaceutical agent model to the MPCM model.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Market of Plasma-based Products
Plasma-based industry is unique and different. Plasma-based pharmaceuticals are unique, biologic medicines that are either infused or injected to treat various rare, life-threatening as well as chronic diseases. Plasma proteins, the primary raw material of plasma-based pharmaceuticals, are separated from blood plasma via fractionation process. Most of the plasma-based pharmaceuticals can only be derived from human blood plasma, a finite resource that cannot be replicated or mass produced through industrial processes. The industry is highly regulated in most countries including China, given: 1) high importance and irreplaceable nature of the plasma- based pharmaceuticals in the critical medical care, and 2) lack of alternative therapies and scarcity of its raw materials.
China is the 2nd largest plasma products market in the world in 2014. In China, the plasma products are significantly undersupplied, resulting in a growth rate higher than overall pharmaceutical industry and the global plasma-based pharmaceutical industry. The market grew at a CAGR of 23.2% from 2010 to 2014, compared to a CAGR of 8.9% for the global plasma-based pharmaceuticals market in the same period, and it is expected to reach RMB54.6bn in 2019, representing a CAGR of 22.4% from 2015, outpacing the growth of the global plasma-based pharmaceuticals market of 9.2% in the same period, according to Frost & Sullivan report.
Human albumin market is growing fast. China’s human albumin market grew rapidly at a CAGR of 22.0% between 2010 and 2014, and is expected to grow at a CAGR of 17.9% from 2015 to 2019, according to Frost & Sullivan report. The imported human albumin market in China is expected to reach RMB16bn in 2019, representing a CAGR of 19.8% from 2015 to 2019, surpassing the expected growth of the overall pharmaceutical market in the same period. China’s imported human albumin is expected to account for 63.4% of the market in 2019, increasing from 58.1% in 2014 and 44.1% in 2010, according to Frost & Sullivan report. The import market helps meet unmet demand for plasma-based pharmaceuticals.
Figure 63: Plasma-based pharmaceuticals market in Figure 64: Human albumin market in China by China (RMB mn) revenue (RMB mn) 60,000 Total Market of Human Albumin Products 2010A-2014A 2015E-2019E 54,565 Market of Imported Human Albumin Products 30,000 CAGR: 23.2% CAGR: 22.4% 50,000 45,095 25,267 25,000 21,744 40,000 36,633 20,000 18,490 29,929 16,019 30,000 15,630 24,273 15,000 13,080 13,656 19,419 10,827 11,335 20,000 9,472 15,510 10,000 9,122 7,099 7,769 12,498 6,289 10,120 6,047 8,440 4,884 5,093 10,000 5,000 3,437 2,152 2,884
0 0 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
China has a lower per capita usage level of plasma products, and significantly different in terms of product composition and range compared with matured markets. Human albumin products dominated China’s plasma products market with a market share of 55.8% in terms of sales revenue in 2014 while IVIG and hyper immunoglobulin products accounted for 24.8% and 10.7%, respectively. Other products including coagulation factors, accounted for the remaining 8.7%, according to Frost & Sullivan report. In more developed countries such as the United States, IVIG products account for a majority of plasma product sales, according to 2014 annual report of CBPO. This difference is mainly due to the different maturity levels of the plasma industries among these countries. Meanwhile, China’s per capita consumption of plasma-based pharmaceuticals, at 149kg per million inhabitants, substantially lags behind that of the United States at 459 kg per million inhabitants in 2012.
Figure 65: Market size of plasma protein in China (US Figure 66: Per capita usage U.S. / China in 2014 bn) 45 3.0 China U.S. 2.5 38.0x 2.5
2.0 30 1.6 1.5 15.3x 1.0 15
0.5 0.4 3.1x 1x 1x 1x 0.0 0 2006 2012 2015E Albumin IVIG Factor VIII Source: CMS (HK) Source: CMS (HK)
China plasma market is highly regulated with very high barriers to entry. China’s plasma market is stringently regulated due to the plasma contamination scandal over the past decade. The China State Council ceased issuing new plasma fractionation licenses since 2001, and there are currently c.30 licensed producers of plasma products in China, of which only less than 25 are in operation. Furthermore, foreign investment in domestic producers of plasma products is restricted and subject to a stringent approval process. As a result, we believe existing players such as Sinco will benefit in the long run amid the favorable policy backdrop.
Import restriction. As a measure to prevent a range of viral risks, China strictly prohibits the importation of plasma products, except for human albumin and other recombinant products (e.g. recombinant factor VIII), base on our research. In those market segments, such as IVIG, where importation is prohibited, domestic producers are protected from competition from their multinational peers, and the demand for such products in China has been entirely met by the domestic names.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
The supply of the raw material is currently the bottleneck. Due to stringent regulations on the collection of raw plasma from human beings and a lack of plasma donation, there has always been a shortage of plasma products in China since 1980s. Due to the imbalance of the supply and demand, plasma manufacturers normally sell their products at the reimbursement price ceiling and generally do not engage in export sales. In 2010, the PRC Ministry of Health (MoH) estimated that China’s market demand for plasma products was 8,000 tonnes per annum while domestic supply only met approximately half of the demand. The current supply shortage has brought to the government attention and we saw new stations have been gradually opened in the recent years. However, we are not expecting supply and demand could even in the near-future.
Figure 67: Plasma collection regulation environment comparison United States China Population (million) 320.6 1,384.7 Donation Frequency twice per 7 days, not within 48 hours twice per month, not within 14 days volumes by weight: Collection Volume 8kg / 69-79kg / >79kg, 580 ml donate 690 / 825 / 880 ml Plasma Collection Centers Over 400 165 Preapproval Requirement No Yes Plasma Donation Compensation $25-35 $42-50 (USD/Donation) Food and Drug Administration (FDA) and County, Municipal and Regulation Agencies Plasma Protein Therapeutics Association (PPTA) Provincial Level Governments Plasma Collected in 2012 (million 21.7 3.8 liters)
Source: CMS (HK)
Removal of the price ceilings. The price ceilings of plasma-based pharmaceuticals as stipulated by Chinese authorities have been rising in recent years. The price ceiling of plasma-based pharmaceuticals, including human albumin, was lifted in June 2015. With such liberalization, we expect the human albumin products of Sinco to enjoy a price uplift in the near future.
Figure 68: Pricing of the plasma-based pharmaceuticals Time of Product Pack Previous Adjusted Price increase Adjustment price ceiling price ceiling Sep 2007 Human albumin 10g 259 360 39%
Sep 2012 Human coagulation Factor VIII 200IU 254 396 56% Human fibrinogen 1g 250 595 138% Jan 2013 Tetanus immunoglobulin 200IU 63.3 69.6 10% Human albumin 10g/Val 360 378 5%
Source: Company, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Supply and Demand of Human Albumin Product in China
We expect unmet demand of Human albumin is likely to be fulfilled in 2018, assuming total albumin supply grow at c.10% in FY16E/17E. Total supply (both domestic and imported) of Human albumin (10g) grew from c.21mn bottles to c.32mn bottles from 2011 to 2015 (at a CAGR of c.11%), according to data from INTZIB. It is worth mentioning that imported plasma played an essential role to propel the fast growing market, as it accounted c.60% market share in 2015. We expect the demand/supply of human albumin products in China will gradually reaching its balance, if we assume the total supply grow at a steady pace of c.10% in the next two years. Admittedly, we might see the breakeven come even sooner, if the total supplies turn out greater than our expectation.
Figure 69: Demand and supply trend for albumin Figure 70: Demand and supply trend (cont’d)
Total Demand Total Supply Total Demand Total Supply Supply as % of Demand 30,000 30,000 140%
115% 25,000 25,000 108% 120% 100% 94% 87% 100% 20,000 20,000 81% 80% 15,000 15,000 60% 10,000 10,000 40%
5,000 20% 5,000
0 0% 0 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E Source: National Health & Family Planning Commission (NHFPC), Source: National Health & Family Planning Commission CMS (HK) (NHFPC), CMS (HK)
Figure 71: Market share of domestic and imported Figure 72: Lot release volume trend for domestic human albumin in China and imported human albumin (in ’000 bottles) Domestic Import Import Domestic Total 100% Import YoY Domestic YoY Total YoY 90% 35,000 35% 80% 30% 30,000 70% 25% 25,000 20% 60% 15% 50% 20,000 10% 40% 15,000 5% 30% 10,000 0% 20% -5% 5,000 10% -10% 0% 0 -15% 2011A 2012A 2013A 2014A 2015A 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A Source: National Institutes for Food and Drug Control (NIFDC), CMS Source: www.zkbio.net/index.php?optionid=993&auto_id=625, (HK) CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Market of Other Selective Therapeutic Areas
Anti-biotics
Figure 73: Market size of injectable cefuroxime sodium Figure 74: Market size of injectable cefoperazone by revenue in China (RMB mn) sodium by revenue in China (RMB mn)
3,500 3,500 2010A-2014A 2015E-2019E 2010A-2014A 2015E-2019E 3,000 CAGR: 8.6% CAGR: 4% 3,000 CAGR: 11.0% CAGR: 3.8% 2,810 2,707 2,503 2,535 2,600 2,407 2,418 2,493 2,500 2,285 2,314 2,500 2,371 2,223 2,214 2,118 2,079 2,142 2,000 1,821 2,000 1,893 1,492 1,563 1,500 1,500
1,000 1,000
500 500
0 0 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
Gastroenterology
Figure 75: Market size of TUDCA in China by revenue Figure 76: Market size of reduced glutathione in (RMB mn) China by revenue (RMB mn)
700 659.9 6,000 2010A-2014A 2015E-2019E 2010A-2014A 2015E-2019E 5,372 600 CAGR: 25.1% CAGR: 48.4% CAGR: 19.8% CAGR: 14.9% 5,000 4,692
500 4,105 425.7 4,000 3,567 400 3,085 3,000 2,660 300 279.0 2,323 1,974 190.4 2,000 200 1,579 136.0 1,291 101.5 1,000 100 62.4 78.8 41.4 50.5
0 0 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Cardiology and Coenzyme Q10 Market
Figure 77: Market size of injectable fructose 1,6- Figure 78: Market size of coenzyme Q10 in China by diphosphate in China (RMB mn) revenue (RMB mn)
1,400 8,000 Consume as a drug Consume as a dietary supplement 2010A-2014A 2015E-2019E 7,196 1,194 1,200 CAGR: 19.8% CAGR: 13.5% 7,000 6,530 1,054 5,912 6,000 1,000 927 5,330 821 5,000 4,781 4,267 800 720 5,493 3,815 640 4,000 5,007 556 3,374 4,548 600 2,927 4,116 470 3,000 2,520 3,718 375 3,350 400 3,004 311 2,000 2,663 2,330 2,000 200 1,000 1,364 1,522 1,703 918 1,063 1,214 520 597 711 811 0 0 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Peers Comparison
We believe 3 listed companies are the closest comparison with Sinco Pharma, namely: China Medical System (867 HK); China Biologic Products (CBPO US); and Huadong Medicine (000963 CH). CMS shares some similarities in the business model with Sinco, while CBPO is one of the largest human albumin manufacturers in China. Huadong Medicine, through its subsidiary Huadong Medicine Ningbo, is the other designated distributor of Octapharma to distribute human albumin products in China, currently covering 7 provinces (Sinco covers 24 provinces).
Gross margins vary among these companies due to different business models deployed. For example, CMS and CBPO have relatively higher gross margin due to their direct sales model as well as significant larger business scale compared with Sinco. Sinco and Huadong Medicine have lower gross margin as majority revenue contributors of these two companies are from the distribution segment, which bears lower gross margin.
Superior growth compared with its peers. Sinco grew fast in recent years with revenue CAGR of 247% and adjusted net profit CAGR of 572% during FY12-15, the highest among peers. This is due to the much smaller scale of Sinco at the beginning. Meanwhile, Sinco is well-positioned to capture the great potential of the fast growing plasma industry, which has better chance to quickly expand its footprints and gradually narrowing the gap with well- established companies such as CMS (867 HK). It is also worth mentioning that Sinco is the only human albumin provider with asset-light business model in China, while other major companies are asset-heavy with internal marketing teams, such as CSL Behring (CSL AU). This greatly boosts efficiency to the company with significantly better SG&A management compared with industry peers, in our view.
Figure 79: Operating metrics Mkt Cap ––Gross Margin (%)––– –Operating Margin (%)– ––––Net Margin (%)–––– –––––––ROE (%)–––––– ––––––ROA (%)–––––– Name 中文名 Ticker (HK$mn) 15A 16E 17E 15A 16E 17E 15A 16E 17E 15A 16E 17E 15A 16E 17E Sinco 兴科蓉药业 6833 HK 1,131 13.9 15.0 15.3 9.7 10.6 12.1 7.6 9.9 10.5 35.9 19.4 25.9 15.0 14.5 19.8
HK Listed Contract Sales Organizations CHINA MEDICAL SY 康哲药业 867 HK 26,265 57.6 56.1 56.5 30.4 28.1 28.1 28.0 26.2 26.1 21.4 21.4 21.4 17.6 15.9 16.0 CHINA NT PHARMA 泰凌医药 1011 HK 3,428 53.3 56.4 55.0 16.2 17.0 16.2 10.3 11.1 11.5 15.9 12.6 15.5 6.1 na na PIONEER PHARM 中国先锋医药 1345 HK 2,773 31.9 29.0 28.0 19.5 16.4 15.8 11.9 15.2 15.9 22.9 21.6 22.8 11.5 10.6 11.1 Average of CSOs 47.6 47.2 46.5 22.0 20.5 20.1 16.8 17.5 17.8 20.1 18.5 19.9 11.7 13.3 13.5
Distributors MCKESSON CORP McKesson 公司 MCK US 306,311 6.4 6.2 6.2 1.7 2.3 2.4 0.8 1.5 1.5 17.9 29.4 27.0 2.8 4.0 3.8 CARDINAL HEALTH Cardinal Health CAH US 215,200 5.6 5.5 5.6 2.1 2.4 2.5 1.2 1.4 1.5 19.2 25.4 26.9 4.3 5.5 6.1 AMERISOURCEBERGE 美源伯根 ABC US 153,564 2.6 3.0 3.1 0.3 1.4 1.5 na 0.9 0.9 na 116.8 71.8 na 5.1 4.7 SINOPHARM-H 国药控股 1099 HK 96,433 8.2 8.2 8.2 4.1 4.1 4.2 1.7 1.7 1.8 13.1 13.8 14.5 2.8 3.0 3.1 SHANG PHARM -A 上海医药 601607 CH 52,950 11.9 11.8 11.5 3.6 3.4 3.4 2.7 2.6 2.6 10.0 10.0 10.3 4.1 4.3 4.5 Average of Distributors 6.9 6.9 6.9 2.4 2.7 2.8 1.6 1.6 1.7 15.0 39.1 30.1 3.5 4.4 4.4
HK Listed China Pharmaceutical Companies SINOPHARM-H 国药控股 1099 HK 96,433 8.2 8.2 8.2 4.1 4.1 4.2 1.7 1.7 1.8 13.1 13.8 14.5 2.8 3.0 3.1 FOSUN PHARMA-H 复星医药 2196 HK 54,269 49.5 48.7 48.2 11.6 14.4 14.6 19.7 16.9 16.7 14.2 13.6 14.6 6.7 5.6 5.8 SHANGHAI PHARM-H 上海医药 2607 HK 52,950 11.9 11.6 11.4 3.6 3.5 3.4 2.7 2.6 2.5 10.0 9.9 10.2 4.1 4.3 4.3 SIHUAN PHARM 四环医药 460 HK 20,728 70.3 70.3 70.3 64.7 64.2 63.4 65.1 55.7 55.3 20.2 16.8 16.2 17.4 15.0 14.5 SINO BIOPHARM 中国生物制药 1177 HK 42,694 77.7 77.4 77.4 20.8 20.6 21.0 12.2 12.2 12.3 24.8 25.2 23.5 11.6 14.5 14.2 CSPC PHARMACEUTI 石药集团 1093 HK 41,673 45.8 47.7 49.6 19.0 21.0 22.8 14.6 16.1 17.4 19.8 21.1 22.2 12.8 13.9 15.2 BAIYUNSHAN PH-H 白云山 874 HK 33,211 35.6 36.6 37.2 6.2 6.7 7.1 6.9 6.7 7.0 16.1 14.1 14.4 8.6 8.7 8.7 SHANDONG WEIG-H 山东威高 1066 HK 21,979 59.4 58.8 58.4 22.3 23.0 23.4 18.8 19.7 20.2 10.9 11.7 12.3 8.7 9.3 9.9 CHINA MEDICAL SY 康哲药业 867 HK 26,265 57.6 56.1 56.5 30.4 28.1 28.1 28.0 26.2 26.1 21.4 21.4 21.4 17.6 15.9 16.0 TRAD CHI MED 中国中药 570 HK 17,307 59.1 56.9 56.9 17.6 21.3 21.6 16.8 15.5 15.8 8.7 11.2 11.0 5.3 6.4 7.0 TONG REN TANG-H 同仁堂科技 1666 HK 15,984 49.9 50.1 50.1 22.1 22.1 22.6 13.6 13.6 13.6 14.4 13.7 14.1 9.2 9.7 10.2 CHINA SHINEWAY 神威药业 2877 HK 7,410 66.2 67.5 68.5 36.1 33.8 33.9 32.0 30.5 30.0 12.9 12.6 11.6 10.9 10.5 10.1 SSY GROUP LTD 石四药集团 2005 HK 7,583 47.2 48.0 48.1 24.4 25.1 25.3 18.2 20.0 20.3 14.3 17.1 17.2 8.2 9.3 9.3 THE UNITED LABOR 联邦制药 3933 HK 5,369 38.5 38.5 39.1 10.0 10.2 10.8 1.4 5.2 5.9 1.6 6.0 6.7 0.6 2.8 3.2 LEE'S PHARM 李氏大药厂 950 HK 3,465 70.3 68.0 66.0 27.6 28.1 26.7 24.8 24.8 23.5 19.1 18.8 15.7 14.2 na na Average of HK listed peers 49.8 49.6 49.7 21.4 21.7 21.9 18.4 17.8 17.9 14.8 15.1 15.1 9.3 9.2 9.4 Source: Bloomberg, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
China Medical System (867 HK)
CMS is the leading provider of pharmaceutical promotion services in China. Headquartered in Shenzhen and operating in China, CMS is the sole promoter and distributor of all its major products, which is quite different from Sinco. Its extensive sales network serves its unique two-pronged business models: 1) direct academic oriented promotion network, consists of c.2,300 sales representatives covering c.20,000 hospitals (major products include Deanxit and Ursofalk), and 2) agencies promotion network of over 1,000 sales representatives covering c.6,000 hospitals (major products are ShaDuoLiKa and YiNuoShu).
Business model
1. Direct academic oriented promotion model (Direct Model) Direct model is the primary business model of CMS, accounting for c.83% in sales in FY15. It utilizes the 2,300 sales representatives to focus on generating product demand at the hospital level through visits, seminars and other academic activities to enhance physicians’ awareness and acceptance. Once demand is generated, the hospital will purchase from the distributor to whom CMS assigned their products. CMS as a promotion service provider will book its sales to distributors as revenue while taking the COGS as purchasing prices from the manufacturers.
Figure 80: Direct model Figure 81: Agency model Manufacturers, Manufacturers, Hospital level Hospital level R&Ds R&Ds
CMS generate demand CMS Physicians educate physicians generate demand Agencies Physicians clinical promotions fulfill demand Distributors Hospital fulfill demand Distributors Hospital
Information Information Patients Patients Products Products Source: CMS (HK) Source: CMS (HK)
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
2. Agency promotion model (Agency Model) CMS is also engaged in agency promotion business via Tianjin Kangzhe, a subsidiary with an extensive agency promotion network. Unlike the direct model which CMS generates hospital demand by itself, CMS deploys over 1,000 external sales representatives to leverage their specialties to cover 6,000 hospitals. We believe the agency model is much more flexible than the direct sales model, and it makes more sense to those generic drugs such as ShaDuoLika and YiNuoShu. Agency model contributed c.17% of CMS total revenue in FY15.
Figure 82: Sales breakdown by business model Figure 83: Business model network comparison (RMB mn) 8,000 25,000 Agency model Direct model Direct model Agency model
7,000 20,000 11% 20,000 6,000 12% 5,000 17% 15,000 4,000 22% 3,000 89% 10,000 24% 88% 6,000 2,000 18% 83% 78% 5,000 76% 1,000 82% 2,300 1,000 - - 2013A 2014A 2015A 2016E 2017E 2018E Hospital coverage Sales representative Source: CMS Annual Report; CMS (HK) Source: CMS Annual Report 2015; CMS (HK) Note: Direct model is outpacing the agency model in 2017E due to the incremental change in new products which are expected to generate revenue starting FY16, and they are under direct model.
CMS has a significantly larger business scale and better margin than Sinco. Total sales and net profit of CMS were RMB2.9bn and RMB996mn in FY15, 2.7 and 11.9 times of the business scale of Sinco. CMS also has a better margin compared with Sinco owing to its larger business scale; stronger bargaining power; long-term stable collaboration with its suppliers and direct hospital coverage. The obvious reason behind this is much longer presence (over 20 years of history) in the industry of CMS, compared with limited operating history of Sinco.
Sinco has much better SG&A management compared with CMS. The one reason CMS has grown into a market leader was its unrivaled drug screening capabilities that could spot potential blockbuster drugs. Sinco is deploying the same methodology but in a different approach, instead of sourcing off-patented chemical drugs, they took it one step further to tap into the plasma industry. China’s plasma industry has very high barriers to entry and currently is highly regulated by the government. The unmet demand will likely to persist in the near future which favors major plasma manufacturers as well as plasma importers, in our view. This result in noticeably lower in SG&A costs compared with CMS, given the current under supplied plasma products as well as the scarcity nature of the industry.
Limited impact for MPCMs from the provincial tendering. The growth story of CMS remains intact despite the recent tougher industry backdrop starting 1H15. CMS faced minimal price erosions (Deanxit: -5% in Zhejiang, largest erosion across the board) during the period owing to the exclusiveness of its major products. We believe Sinco to face limited price erosions of its major products down the road, given: 1) majority of the revenue come from human albumin, the ASP of plasma products are poised to raise in FY16; 2) the company is strategically set the ASP of its anti-biotic products well below the tender price, which is more defensive to the further price cut; and 3) there are currently no direct competitor in the TUDCA space, meaning limited price cut to Taurolite.
CMS is currently trading at 16.7x 2016E P/E and 0.79x PEG, as of 19th Apr 2016, based on our assumption. To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
China Biologic Products (CBPO US)
Leader in the fast-growing plasma industry with strong market position in China. CBPO is principally engaged in the research, development, manufacturing and sales of plasma-based biopharmaceutical products, and is one of the largest producers of plasma products in China. The company is based in Beijing, operating through its two major production bases located in Tai’an, Shandong Province and Guiyang, Guizhou Province. CBPO leveraged these two bases and established 13 captive plasma collection centers, collect and process c.600 tons of human plasma every year, topping at 3rd largest plasma collector in China and accounting for c.15% of the total national supply in China in 2015. The company also has 35% equity stake in Xi’an Huitian Blood Products, a plasma-based manufacturer in Xi’an, Shaanxi Province. Rich product portfolio and strong pipeline products. The company currently has over 20 different plasma products including human albumin, immunoglobulin, hepatitis B immunoglobulin and coagulation factor VIII, and continues to introduce new products through its strong R&D platform, including the recent releases of coagulation factor VIII (200 units) in Oct 2012, coagulation factor VIII (300 units) in 2H13 and prothrombin complex (obtained product approval in 2013 and GMP certificate in Oct 2014) in Oct 2014. The company also has other non-plasma product such as Placenta Polypeptide Injection which has already been approved by the China Food and Drug Administration (CFDA). By using human placenta as the raw material, production would no longer be restricted by plasma supply. Moreover, the strong pipeline products such as human fibrinogen and human hepatitis B immunoglobulin could potentially boost yield per unit volume of plasma output and gradually lift the profit margin in the upcoming years. Comprehensive sales and marketing network with strong terminal control capabilities. CBPO has a sales team of 124 people conducting direct sales to over 595 hospitals and inoculation centers in 30 provinces, accounting for 59.0% of the total sales by the end of 2015. With its strong terminal control capabilities, the company has greatly reduced the risk of sourcing from the grey market. Shandong and Jiangsu are the two largest markets which accounted for 23.2% and 10.0% of the total revenue in 2015, respectively. Meanwhile, for those tier-1 cities such as Beijing, Shanghai and Guangzhou where the government does not allow direct sales, the company has been able to work with local distributors to penetrate the market. The company’s newly launched products such as immunoglobulin and coagulation factor VIII will benefit from its strong coverage in the tier-1 cities.
Figure 84: Fully integrated R&D, plasma collection, manufacturing, and distribution platforms Manufacturing Plasma Collection Distribution Strategy (Fractionation) GMP Certified Plasma Collection Centers Unique Distribution Model Production Bases 13 in operation 3 in operation Focused in tier-1 cities 2 under construction c.124 sales representatives Products sold directly to
over 595 hospitals and clinics
Source: CMS (HK)
Sinco has greater market share of human albumin than CBPO in China. CBPO’s human albumin accounted c.38% of the total sales in FY15, which is the 2nd largest revenue contributor during the period. Human albumin is the only blood product allowed to be imported from the overseas by the government due to its significance and under-supplied nature. The largest three multinational plasma product manufacturers accounted for c.46% of China’s albumin products market in 2014, with CSL Behring as the market leader taking 23.6% market share in terms of sales volume in 2014, followed by Grifols and Baxter, and Sinco came in at 4th place in the industry with 7.3% market share in terms of revenue in FY14, larger than 5.8% market share of CBPO, according to Frost & Sullivan.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Coaguation factor VIII is still nascent to the China market with significant growth potential. CBPO launched this product in late 2012 and currently with c.3% revenue contribution to the FY15 total sales. We expect exponential growth of factor VIII in FY15 for CBPO as the company has overcome its capacity issue in late 2014. We believe Sinco has the competitive advantage to tap into this fast growing market in the near future, given: 1) the recombinant product is currently allowed to be imported from overseas due to its scarcity nature; 2) only few domestic manufacturers are capable of manufacturing the product; and 3) healthy relationship with Octapharma.
CBPO is currently trading at 29.7x 2016E P/E (US GAAP) and 1.08x PEG, as of 19th Apr 2016, based on our assumption.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Huadong Medicine (000963 CH)
Huadong Medicine primarily engaged in manufacturing, trading, distribution and R&D businesses. Based in Hangzhou, the company recorded FY15 manufacturer and trading sales of RMB4.7bn/17bn, +29%/+11% YoY compared with FY14. Huadong Medicine is the largest pharmaceutical conglomerate in Zhejiang in terms of revenue as well as market share, and it possessed one of the best pharmaceutical trading and distribution platforms in China.
Extensive sales coverage on major middle-to-large sized hospitals in China. The company has c.2,300 academic promotion and marketing professionals to cover major medium-to-large sized hospitals in China. Meanwhile, the company is expanding its sales force to gradually tap into the grass-root market; cutting costs for better efficiency; and leveraging its rich product mix; resources and platform advantages to boost internal synergies.
Huadong Medicine Ningbo is the distribution arm of Huadong Medicine. The company was founded in 1993 as a wholesaler of biological products, a subsidiary of Huadong Medicine (000963 CH). The company has advanced operational facilities and state-of-the-art storage conditions for medicine logistics and distribution, including cold chain delivery service which pioneers in the industry. The company currently has 17 domestic branch offices covering more than 20 provinces. The company established productive co-operational relationships with many large companies in China, including Hualan Bio (002007 CH); Xiamen Bioway and Shanghai Celstar.
Figure 85: Logistics and distribution segment growth Figure 86: Segment contribution (RMB bn)
Revenue YoY % Others Logistics and Distribution Business Manufacturing Business 100% 18 40% 90% 16 80% 31.6%
Thousands 14 30% 70% 12 25.7% 78.2% 60% 82.2% 82.7% 83.1% 81.8% 80.6% 10 50% 20.6% 20% 8 40% 13.4% 6 11.2% 30% 10% 4 10.9% 20% 21.8% 2 10% 17.2% 17.0% 16.6% 18.0% 19.4% 0 0% 0% 2010A 2011A 2012A 2013A 2014A 2015A 2010A 2011A 2012A 2013A 2014A 2015A Source: Huadong Medicine annual report Source: Huadong Medicine annual report
Huadong Medicine Ningbo has rich product portfolio in the biological department. The company distribute vast majority of plasma products in its biological portfolio, including human albumin; immunoglobulin for intravenous injection (IVIG); factor VIII; prothrombin complex (PCC); and recombinant human erythropoietin injection. The rich product portfolio together with extensive promotion network from the parent company made Huadong Medicine Ningbo a serious contender in the distribution industry.
Huadong Medicine Ningbo is the first human albumin distributor for Octapharma in China. Huadong Medicine Ningbo became the sole distributor of Octapharma to sale its human albumin product nation-wide in China starting 2004. After eye-witnessing a CAGR of c.26% growth in the plasma industry (excluding recombinant products) in China during 2006 to 2012 and meet sales targets, Octapharma introduced Sinco to become its second distributor in order to broaden its distribution channel to address the unmet demand amid the exponential growth.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Sinco currently has much larger market share in distributing human albumin in China. Sinco is currently covering 24 provinces and contributing over 75% of Octapharma’s sale of its human albumin product in China in 2014, +36% YoY compared with sales in 2013. The company also more than doubled its market share in China’s human albumin market from 3.5% in 2013 to 7.3% in 2014. Huadong Medicine, on the other hand, only account less than 25% of Octapharma’s sales of human albumin product in China in 2014, according to Frost & Sullivan report.
Huadong Medicine is currently trading at 23.0x 2016E P/E and 1.05x PEG, as of 19th Apr 2016, according to Bloomberg.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Pacific Biopharmaceutical (Pacific Bio)
Pacific Bio is the sole plamsa-based manufacture in the Northeast region in China. Founded in 1992, the company currently operates 9 plasma stations which all located in Heilongjiang province in the Northeast region. The company aims to open up 4 additional stations in Heilongjiang and 1 in Sichuan in 2016, and 5 more in Heilongjiang province in 2017. The company has c.RMB300mn (c.+30% YoY) in revenue in FY15 while net profit amounted c.RMB70mn (c.+21% YoY) during the period.
The total plasma collection were 105/113/155 tons in FY13/14/15. The robust +37% increase in plasma collection in FY15 was mainly attributable to: 1) new collection stations; 2) better collection volume result from more stringent control over its existing stations; 3) better promotion techniques as well as nutrition fee structure to expand donor base; and 4) expand geographic coverage to gain additional donor populations.
Pacific Bio targeted a total of 240 tons of plasma collection in 2016. This represents +54% over its existing plasma collection volume in FY15, which is significant higher than the industry average of c.10% in organic growth from the existing stations. We believe this is only achievable if we take into consideration of: 1) better utilization rate; 2) additional collection stations to start operating in the near-term; and 3) expand donor base from its existing stations.
Similar to CBPO, Pacific Bio currently covering three major catagories of plasma-based products. Human albumin, the largest revenue contributor for the company in FY15 (c.50%), currently the 10th domestic albumin supplier according to the lot release volume data in 2014; Immunoglobulins, representing c.42% of the total revenue, also ranked 10th in terms of the lot release volume from the domestic suppliers in 2014; Human fibrinogen, contributed c.8% to its total revenue, ranked 4th place in China (top 3 being: Boya; Hualan and RAAS) during the period.
Pacific Bio has a gross margin of c.50%, lower than the industry average of north 60%. The lower gross margin was mainly attributable to: 1) low utilization rate to its existing stations; and 2) low output compared with other major domestic suppliers. We expect the gross margin to expand in the upcoming years, which is supported by: 1) ramp-up in utilization rate; and 2) lift in ASP to its major products.
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Appendix
Figure 87: Company structure Liu Sichuan Huang Xiangbin H e Ji (Kelun Pharmaceutical’s (F o under) (Investo r) D irecto r & D eputy
100% 100% 100%
Risun Investments B rightso me Sky Wisen Group Holding P ublic Limited Investments Limited Limited
65.63% 3.75% 5.63% 25%
Sinco Pharmaceuticals Holding Limited
100%
Starwell Group Holding Limited
100%
Hong Kong Prosperous Group Holding Limited
100%
Sichuan Sinco Pharmaceuticals Co., Ltd.
100% 100% 70% Chengdu Hengsheng Ziguang Chengdu Sinco Sichuan Sinco Biotechnology Pharmaceutical Technology Co., Pharmaceuticals Co., Ltd. C o ., Ltd. Ltd. 100%
Xizang Linzhi Ziguang Pharmaceutical Co., Ltd. Source: Company
Figure 88: Company milestone • Mr. Huang established Sichuan Sinco Pharmaceuticals in Chengdu, Sichuan Province • Established a long-term partnership with Medochemie, became the exclusive MPCM service provider in 2011 China for Axetine and Medocef • Entered into the sales contract with Suzhou Zhongxin Pharmaceuticals Company Limited for the distribution of Axetine and Medocef, and formulated the marketing and promotional strategies to facilitate the sales
• Established a long-term partnership with Octapharma through signing a long-term distribution agreement •In August 2015, Octapharma confirmed Sinco's exclusive right to service Human Albumin Solution in 24 2012 provinces and regions
•Sinco Biotechnology was established by Sichuan Sinco Pharmaceuticals and Kang Tai Yun Dao, with a primary 2013 focus on research and development
• Chengdu Sinco Pharmaceuticals, located in Sichuan Shuangliu Bonded Area, was established by Sinco Biotechnology, with a primary focus on the design, operation and management of a cold chain facility and 2014 aims to be one of the largest cold chain centres in Southwest China
• Hong Kong Prosperous established cooperation with Trendful, the exclusive sales agent for Bruschettini and Foscama, through a distribution authorisation agreement with Vast Surplus 2015 • Entered into a collaboration agreement with Liaoning Wanjia to become the exclusive service provider for Xinneng Q10, a dietary supplement registered with the CFDA, in China
2016 •Listing on the Hong Kong Stock Exchange on 10 March 2016
Source: Company
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 89: Senior management Name Title Age Responsibilities Background Appointment Date Date Joined Mr. HUANG Founder 49 • Responsible for overall • 26 years of experience in China’s pharmaceutical sector 1-Jun-15 11-Apr-11 Xiangbin Chairman strategic planning and • Director and Chairman of Vast Surplus since November 2004 CEO business development • Worked in drug testing and identification department of Drug Inspection Institute of Guangyuan, Executive • Chairman of the Sichuan Province, and Beijing Guangtong Shidai Medical Consultant Company Limited Director Nomination Committee • Obtained a master’s degree in EMBA from Shanghai Jiao Tong University in December 2008 and graduated from the MBA programme of Renmin University in August 2002 Ms. ZHANG Executive 46 • Responsible for new • Served as a postdoctoral fellow, an associate chief (starting from July 2013), and a researcher 2-Jun-15 25-Nov-13 Zhijie Director and pharmaceuticals research (starting from December 2014) of the biological pharmaceuticals research centre of the Institute of Vice President and development Chinese Medical Sciences from July 2008 for Technics • Served as the general manager of Zhaoye Bio-Technology Co., Ltd, a subsidiary of Nanjing Xiaoying Pharmaceuticals Group Co., Ltd, from July 2006 to October 2008, mainly responsible for new drug research and development • bachelor’s degree in pharmacy from Henan University of Traditional Chinese Medicine in July 1990 Mr. LI Zhizheng Senior Vice 42 • Responsible for the • Served as a deputy general manager of Great Holdings Limited from November 2010 to June 2011 2-Jun-15 4-Jul-11 President strategic planning and • Held various positions in Dong Shang International Holdings Limited, including manager of the investment management finance department, assistant to the chairman and general manager of the company’s subsidiary • Served as the manager of the audit department of Beijing Zhong Tian Yong Xin Certified Public Accountants from May 2003 to August 2005 • Obtained CICPA in December 2000 and an EMBA degree from Shanghai Jiao Tong University in December 2009 Mr. LI Yifan CFO 35 • Responsible for the • Over 10 years of experience in accounting and financial management 2-Jun-15 1-Feb-15 overall financial strategy • worked at China Polymetallic Mining Limited from March 2011 to January 2015 as deputy CFO planning, internal control • Served as an auditor of Shenzhen branch and senior auditor of Chengdu branch, of Ernst & Young system management, and Hua Ming LLP. from February 2005 to February 2011 investment and financing • Obtained a master of science degree in Finance from University of Stirling in January 2005 management Mr. LIU Guowei Vice President 39 • Responsible for the • 16 years of experience in operation and human resources management 2-Jun-15 1-Dec-14 for Operations overall operations • Served as a managing director and principal consultant of Beijing Talenbridge International Management Consulting Service Co., Ltd. from January 2009 to September 2014 • Served as human resources director of Beijing Longfor Property Company Limited from August 2007 to December 2008 • Obtained an EMBA degree from Shanghai Jiao Tong University in June 2012 Ms. WU Yue Director of 36 • Responsible for sales • Served as a business manager of Chengdu City of Baxter Healthcare Trading (Shanghai) Co., Ltd. 2-Jun-15 29-Dec-14 Sales and marketing from October 2014 to December 2014 • Served as a regional business manager of Jin Bao Shen Nursing Products (Shanghai) Co., Ltd. from June 2013 to September 2014 • Served as a senior regional business manager of Becton Dickinson Medical Devices (Shanghai) Co., Ltd. from November 2008 to June 2013 • Served as regional manager of commercial and retail business department of Pfizer Investment Co., Ltd from September 2004 to October 2008 • Received a bachelor’s degree in accounting from Southwestern University of Finance and Economics in June 2004 Mr. PENG Fei Financial 42 • Responsible for overall • Served as the finance manager of Ruixin from September 2004 to March 2011 2-Jun-15 21-Apr-11 Controller finance management • Served as the finance staff of the Third Construction Section of the Factory Construction Engineering Bureau, the Ministry of Railway and China Railway Construction Engineering Group North Project Co., Ltd from September 1991 to August 2004 • Received a bachelor’s degree in accounting from Southwestern University of Finance and Economics in December 2006 • Obtained the qualification of Registered Tax Agent issued by Sichuan Provincial Human Resources Department in April 2009, and obtained the licence of Senior Accountant from Chengdu Reform Leading Group of Professional Title in April 2013 Mr. HU Haibin Deputy 43 • Responsible for the • Over 10 years of experience in sales management 2-Jun-15 18-Apr-11 Director of marketing management • Served as sales manager of Ruixin and was mainly responsible for its sales management from Sales June 2004 to March 2011 • Served as project manager of Sichuan Yuan Zhou Information Technology Company Limited , from August 1995 to May 2004 • Received an associate degree in economic information and computer application from Sichuan Economic Management Cadre Institute in July 1995 Ms. BAI Ling Assistant to 36 • Responsible for the • Served as the manager of the administration and personnel department of Ruixin,from October 2004 2-Jun-15 11-Apr-11 CEO internal management to March 2011 • Received a bachelor’s degree in accounting from Chengdu University of Technology in June 2004 Mr. LI Deputy 31 • Responsible for the • Over 7 years of experience in sales and marketing management 2-Jun-15 7-Apr-11 Xianghong Director of marking and promotion of • Served as the sales manager of Ruixin from July 2009 to March 2011 Sales the Human Albumin • Served as regional manager of Jiangsu Chinese Pharmaceutical Technology Development Solution, Taurolite, TAD and Corporation from May 2007 to May 2009 Esafosfina • Graduated from Chengdu University of Technology and received degree in numerical control machining technology in June 2006 Source: Company
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Figure 90: Peers valuation comparison Mkt Cap P/E P/B Name 中文名 Code Currency (million) 15A 16E 17E 15A 16E 17E JIANGSU HENGRUI MEDICINE C-A 恒瑞医药 600276 CH RMB 93,480 44.1 34.5 27.5 9.6 7.4 5.9 YUNNAN BAIYAO GROUP CO LTD-A 云南白药 000538 CH RMB 63,630 27.3 18.8 16.2 n.a. 3.8 3.1 SHANGHAI FOSUN PHARMACEUTI-A 复星医药 600196 CH RMB 45,523 22.0 15.6 13.5 3.0 2.2 1.9 TASLY PHARMACEUTICAL GROUP-A 天士力 600535 CH RMB 40,896 29.7 23.8 20.4 5.9 4.8 4.1 BEIJING TONGRENTANG CO-A 同仁堂 600085 CH RMB 39,910 69.2 39.9 35.3 8.6 5.0 4.6 HUADONG MEDICINE CO LTD-A 华东医药 000963 CH RMB 33,995 32.4 23.0 19.5 12.0 5.6 4.5 HUNAN ER-KANG PHARMACEUTI -A 尔康制药 300267 CH RMB 32,445 50.9 37.0 27.4 8.3 6.6 5.5 LEPU MEDICAL TECHNOLOGY-A 乐普医疗 300003 CH RMB 31,471 60.2 42.9 34.1 6.5 5.7 4.8 AIER EYE HOSPITAL GROUP CO-A 爱尔眼科 300015 CH RMB 31,228 71.8 52.9 39.1 12.9 10.8 8.7 SHENZHEN SALUBRIS PHARM-A 信立泰 002294 CH RMB 29,435 24.9 19.5 16.3 6.9 5.4 4.5 JOINTOWN PHARMACEUTICAL-A 九州通 600998 CH RMB 29,300 n.a. 35.8 29.8 n.a. 3.4 3.2 HUALAN BIOLOGICAL ENGINEER-A 华兰生物 002007 CH RMB 25,513 43.4 34.3 27.6 7.0 5.9 5.0 SICHUAN KELUN PHARMACEUTIC-A 科伦药业 002422 CH RMB 23,026 41.3 n.a. n.a. 2.4 1.9 1.8 ZHEJIANG HUAHAI PHARMACEUT-A 华海药业 600521 CH RMB 22,335 45.3 38.2 28.7 5.6 5.5 4.8 CHINA RESOURCES SANJIU MED-A 华润三九 000999 CH RMB 22,290 21.3 17.4 15.8 3.5 2.6 2.2 HARBIN GLORIA PHARMACEUTIC-A 誉衡药业 002437 CH RMB 21,251 32.0 23.6 19.3 n.a. n.a. n.a. JIANGSU YUYUE MEDICAL EQU-A 鱼跃医疗 002223 CH RMB 18,619 62.0 39.3 31.0 10.6 6.2 5.2 HAISCO PHARMACEUTICAL GROU-A 海思科 002653 CH RMB 18,537 62.5 41.9 37.3 10.9 6.9 6.0 BEIJING SL PHARMACEUTICAL -A 双鹭药业 002038 CH RMB 18,020 n.a. 24.7 21.0 n.a. 4.2 3.7 ZHEJIANG CONBA PHARMACEUTI-A 康恩贝 600572 CH RMB 17,307 47.7 27.2 24.0 5.4 3.6 3.1 SHIJIAZHUANG YILING PHARMA-A 以岭药业 002603 CH RMB 16,238 46.5 30.3 25.7 4.2 3.1 2.8 TIANJIN CHASE SUN PHARM-A 红日药业 300026 CH RMB 14,816 35.2 21.1 18.2 4.0 2.7 2.4 BEIJING TIANTAN BIOLOGICAL-A 天坛生物 600161 CH RMB 14,536 n.a. n.a. n.a. 9.3 7.0 6.8 GUIZHOU YIBAI PHARMACEUTIC-A 益佰制药 600594 CH RMB 14,128 n.a. 23.2 18.7 n.a. 3.0 2.6 BEIJING BEILU PHARMACEUTIC-A 北陆药业 300016 CH RMB 8,464 n.a. 51.7 38.2 n.a. 9.3 7.7 GUANGDONG ZHONGSHENG PHA-A 众生药业 002317 CH RMB 8,419 32.3 21.3 18.1 4.7 3.5 3.0 ZHEJIANG XIANJU PHARMA-A 仙琚制药 002332 CH RMB 7,153 75.8 41.8 n.a. 4.3 3.1 2.8 INNER MONGOLIA FURUI MEDIC-A 福瑞股份 300049 CH RMB 6,431 n.a. 53.1 35.4 n.a. 5.8 5.0 HENAN LINGRUI PHARMACEUTIC-A 羚锐制药 600285 CH RMB 5,671 53.0 28.6 21.2 4.2 2.6 2.3 Simple Average 44.8 31.9 25.4 6.8 4.9 4.2 Weighted Average 37.4 29.0 23.3 5.8 5.0 4.2 Mkt Cap P/E P/B Name 中文名 Code Currency (million) 15A 16E 17E 15A 16E 17E SINOPHARM GROUP CO-H 国药控股 1099 HK HKD 99,200 19.1 18.8 16.1 2.4 2.5 2.1 SHANGHAI PHARMACEUTICALS-H 上海医药 2607 HK HKD 53,212 13.1 11.9 10.6 1.3 1.2 1.1 SINO BIOPHARMACEUTICAL 中国生物制药 1177 HK HKD 42,101 20.8 21.0 18.0 6.7 4.4 3.6 CSPC PHARMACEUTICAL GROUP LT 石药集团 1093 HK HKD 41,022 28.1 20.2 16.6 5.4 4.1 3.5 GUANGZHOU BAIYUNSHAN PHARM-H 白云山 874 HK HKD 33,233 18.2 13.3 12.0 2.8 1.9 1.6 CHINA MEDICAL SYSTEM HOLDING 康哲药业 867 HK HKD 26,415 23.7 16.5 13.7 4.5 3.0 2.6 3SBIO INC 三生制药 1530 HK HKD 26,411 39.6 26.4 20.3 4.1 3.4 2.9 SHANDONG WEIGAO GP MEDICAL-H 山东威高 1066 HK HKD 21,889 17.8 14.2 12.3 1.9 1.6 1.4 SIHUAN PHARMACEUTICAL HLDGS 四环医药 460 HK HKD 20,625 18.4 7.5 7.9 3.4 1.4 1.2 LUYE PHARMA GROUP LTD 绿叶制药 2186 HK HKD 18,764 29.8 17.6 15.3 4.0 2.3 2.0 CHINA TRADITIONAL CHINESE ME 中国中药 570 HK HKD 17,576 25.5 12.8 10.9 1.8 1.3 1.2 TONG REN TANG TECHNOLOGIES-H 同仁堂科技 1666 HK HKD 15,933 25.4 21.3 18.5 3.4 2.8 2.5 PHOENIX HEALTHCARE GROUP CO 凤凰医疗 1515 HK HKD 9,038 37.9 27.7 22.0 3.6 3.8 3.4 SSY GROUP LTD 石四药集团 2005 HK HKD 7,640 14.5 16.1 14.2 2.6 2.5 2.3 CHINA SHINEWAY PHARMACEUTICA 神威药业 2877 HK HKD 7,476 10.3 8.9 9.0 1.3 1.0 1.0 BEIJING TONG REN TANG CHINES 同仁堂国药 8138 HK HKD 7,174 23.5 17.5 15.0 4.6 3.4 2.9 YICHANG HEC CHANGJIANG PHARM 东阳光药 1558 HK HKD 7,159 15.9 15.4 12.4 2.6 2.4 2.1 HUA HAN HEALTH INDUSTRY HOLD 华瀚健康 587 HK HKD 6,210 11.3 9.3 8.4 1.2 n.a. n.a. BLOOMAGE BIOTECHNOLOGY 华熙生物科技 963 HK HKD 5,717 28.4 18.4 15.5 4.7 3.3 2.7 SHANGHAI FUDAN-ZHANGJIANG-H 复旦张江 1349 HK HKD 5,418 50.4 26.7 19.0 8.8 5.0 4.0 THE UNITED LABORATORIES INTE 联邦制药 3933 HK HKD 5,206 63.3 12.9 10.6 1.0 0.8 0.7 CONSUN PHARMACEUTICAL GROUP 康臣药业 1681 HK HKD 3,933 17.0 10.5 9.0 2.6 1.8 1.6 LEE'S PHARMACEUTICAL HLDGS 李氏大药厂 950 HK HKD 3,682 24.4 14.7 13.3 3.9 2.2 1.9 PW MEDTECH GROUP LTD 普华和顺 1358 HK HKD 3,272 12.5 11.4 10.3 n.a. 1.1 1.0 CHINA PIONEER PHARMA HOLDING 中国先锋医药 1345 HK HKD 2,800 18.0 10.6 9.2 n.a. n.a. n.a. UNIVERSAL HEALTH INTERNATION 大健康国际 2211 HK HKD 1,700 157.0 3.1 2.7 n.a. n.a. n.a. Simple Average 29.4 15.6 13.2 3.4 2.5 2.1 Weighted Average 22.8 17.0 14.4 3.3 2.5 2.2 Source: Bloomberg as of 19th Apr 2016
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Financial Summary
Balance Sheet Profit & Loss Statement RMB million 2014A 2015A 2016E 2017E 2018E RMB million 2014A 2015A 2016E 2017E 2018E Cash and ST investments 70 60 245 370 616 Revenue 950.1 1,096.1 1,410.1 1,816.0 2,219.3 Inventories 101 47 90 146 138 Cost of sales -820.3 -943.6 -1,199.0 -1,538.1 -1,854.0 Other current assets 37 77 77 122 122 Gross profit 129.8 152.5 211.1 277.9 365.3 Total Current Assets 288 219 448 673 911 SG&A expenses -24.3 -46.2 -80.1 -58.1 -67.6
Property. Plant & Equipment 100 97 140 151 164 Operating profit 105.5 106.3 131.0 219.8 297.8 Other assets 5 3 3 3 3 Interest Income 1.4 0.4 1.1 2.5 3.9 Intangible assets 48 110 105 100 95 Interest Expense -6.2 -7.1 -3.1 -3.1 -3.1 Total Non-current Asset 153 245 283 290 297 Total Assets 441 464 731 962 1,208 PBT 93.8 86.6 120.5 209.9 288.5 Income tax -13.7 -17.2 -14.5 -18.9 -43.3 Accounts Payable 19 63 55 96 97 Minority interest -10.8 0.2 0.0 0.0 0.0 ST bank loans 92 82 32 32 32 Income Taxes Payable 6 9 9 9 9 Adjusted Net Profit 80.1 83.6 139.9 191.0 245.3 Other Current Liabilities 73 83 53 53 53 Basic EPS 0.067 0.058 0.066 0.118 0.152 Total Current Liabilities 318 271 183 224 225 Adjusted EPS 0.067 0.070 0.087 0.118 0.152 Net Income attributable to 69.4 69.6 106.1 191.0 245.3 Total Liabilities 318 271 183 224 225 Rshareholdersatio 2014A 2015A 2016E 2017E 2018E Minority interest 18 0 0 0 0 Growth (YoY) Common equity 0 0 354 545 790 Revenue 78.4% 15.4% 28.7% 28.8% 22.2% Total Equity 123 194 547 738 983 Gross profit 112.3% 17.5% 38.4% 31.6% 31.5% Operating profit 115.7% 0.8% 23.2% 67.8% 35.5% BPS (US) 0.1 0.2 0.3 0.5 0.6 Adjusted Net profit 86.4% 4.4% 67.3% 36.5% 28.4% Cash Flow Statement RMB million 2014A 2015A 2016E 2017E 2018E Margin PBT 94 87 121 210 289 Gross Margin 13.7% 13.9% 15.0% 15.3% 16.5% Depreciation and amortization 2 10 11 14 14 Operating Margin 11.1% 9.7% 9.3% 12.1% 13.4% Operating profit before change in WC 104 108 134 225 302 Adjusted Net Profit Margin 8.4% 7.6% 9.9% 10.5% 11.1% Funds from other operating activities -37 -48 -81 -60 8 Cash from operating activities 53 46 40 149 270 Efficiency Inventory Days 56 28 28 28 28 Capital expenditure -33 -10 -49 -21 -21 Trade Receivable Days 9 19 20 20 20 Interest received 1 0 1 2 4 Account Payable Days 6 16 18 18 19 Cash from Investing Activities -42 -54 -49 -21 -21 Financial Ratios Common dividends (cash) -5 0 0 0 0 Current Ratio (x) 0.9 0.8 2.4 3.0 4.1 Cash from Financing Activities 14 -3 194 -3 -3 Quick Ratio (x) 0.6 0.6 2.0 2.4 3.4 ROA 18.2% 15.0% 14.5% 19.8% 20.3% Net Change in Cash 26 -11 185 125 246 ROE 64.9% 35.9% 19.4% 25.9% 24.9% Net Cash - Beginning Balance 44 70 60 245 370 Net Debt/Equity 27.3% 22.6% Net Cash Net Cash Net Cash Net Cash - Ending Balance 70 60 245 370 616
Valuation P/B (x) 5.8 3.7 1.8 1.3 1.0 P/E (x) 8.9 8.5 6.8 5.0 3.9
Sources: Company, CMS (HK) estimates
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
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
Analyst Disclosure The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this research report.
Regulatory Disclosure Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html.
Disclaimer This document is prepared by China Merchants Securities (HK) Co., Limited (CMS HK). CMS HK is a licensed corporation to carry on Type 1 (dealing in securities), Type 2 (dealing in futures), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance (Chapter 571). This document is for information purpose only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer or solicitation of an offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever to buy or sell any security, financial instrument or any investment or other specific product. The securities, instruments or strategies discussed in this document may not be suitable for all investors, and certain investors may not be eligible to participate in some or all of them. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. CMS HK is not registered as a broker- dealer in the United States and its products and services are not available to U.S. persons except as permitted under SEC Rule 15a-6.
The information and opinions, and associated estimates and forecasts, contained herein have been obtained from or are based on sources believed to be reliable. CMS HK, its holding or affiliated companies, or any of its or their directors, officers or employees (CMS Group) do not represent or warrant, expressly or impliedly, that it is accurate, correct or complete and it should not be relied upon. CMS Group will not accept any responsibility or liability whatsoever for any use of or reliance upon this document or any of the content thereof. The contents and information in this document are only current as of the date of their publication and will be subject to change without prior notice. Past performance is not indicative of future performance. Estimates of future performance are based on assumptions that may not be realized. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Opinions expressed herein may differ or be contrary to those expressed by other business divisions or other members of CMS Group as a result of using different assumptions and/or criteria.
This document has been prepared without regard to the individual financial circumstances and investment objectives of the persons who receive it. Use of any information herein shall be at the sole discretion and risk of the user. Investors are advised to independently evaluate particular investments and strategies, take financial and/or tax advice as to the implications (including tax) of investing in any of the securities or products mentioned in this document, and make their own investment decisions without relying on this publication.
CMS Group may have a long or short position, make markets, act as principal or agent, or engage in transactions in securities of companies referred to in this document and may also perform or seek to perform investment banking services or provide advisory or other services for those companies. This document is for the use of intended recipients only and this document may not be reproduced, distributed or published in whole or in part for any purpose without the prior consent of CMS Group. CMS Group will not be liable for any claims or lawsuits from any third parties arising from the use or distribution of this document. This document is for distribution only under such circumstances as may be permitted by applicable law. This document is not directed at you if CMS Group is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. In particular, this document is only made available to certain US persons to whom CMS Group is permitted to make available according to US securities laws, but cannot otherwise be made available, distributed or transmitted, whether directly or indirectly, into the US or to any US person. This document also cannot be distributed or transmitted, whether directly or indirectly, into Japan and Canada and not to the general public in the People’s Republic of China (for the purpose of this document, excluding Hong Kong, Macau and Taiwan).
To access our research reports on the Bloomberg terminal, type CMHK
Wednesday, April 20, 2016
Important Disclosures for U.S. Persons This research report was prepared by CMS HK, a company authorized to engage in securities activities in Hong Kong. CMS HK is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution solely to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act).
Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through CMS HK. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below.
The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (FINRA) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication.
Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months.
Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither CMS HK nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report.
CMS HK may rely on information barriers, such as Chinese Walls to control the flow of information within the areas, units, divisions, groups, or affiliates of CMS HK.
Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States.
The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments.
Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by CMS HK with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein.
No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of CMS HK and CMS HK accepts no liability whatsoever for the actions of third parties in this respect.
Hong Kong China Merchants Securities (HK) Co., Ltd. Address: 48/F, One Exchange Square, Central, Hong Kong Tel: +852 3189 6888Fax: +852 3101 0828
To access our research reports on the Bloomberg terminal, type CMHK