Acquisition of Finished Drug Businesses Reduces Bulk Exposure
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June 27, 2012 COMMENT China Pharmaceutical Group (1093.HK) HK$2.05 Equity Research Acquisition of finished drug businesses reduces bulk exposure News China Pharm has announced the acquisition of three finished drug companies from its parent for a total consideration of HK$8.98 bn (HK$2.271 bn equity and HK$6.708 bn in convertible bonds). Total 2011 NPAT of the acquired companies was Rmb314 mn (HK$383mn) in 2011 (vs HK$233 mn for China Pharm). China Pharm also stated that net tangible assets of the acquired companies will be no less than HK$950 mn at completion. Assuming an HK$600mn/HK$800mn earnings contribution as guided by China Pharm for target companies in 2012E/13E, we calculate EPS accretion will be HK$0.103/0.137 on a fully converted basis post share allotment and CB issuance respectively, which gives an acquisition P/E multiple of 15x/11x for 2012/13E respectively. Analysis The acquisitions are: (1) CSPC OYY, owning four pharma manufacturing sites with GMP standards and four bulk drugs production lines meeting global standards. It manufactures over 200 pharma products, including Azithromycin capsules, Alendronate sodium tablets and Levoamlodipine Maleate tablets. NPAT was Rmb114mn in 2010 and Rmb142mn in 2011, with 2011 year-end NAV of Rmb220mn. The OYY subsidiaries’ NPAT were Rmb-0.468mn/Rmb0.295mn in 2010/2011. (2) CSCP NBP, engaged primarily in the manufacture of drugs for the central nervous system (CNS), e.g. cerebrovascular drug Butylphthalide Soft Capsules. NPAT was Rmb13.99mn/Rmb105.5mn in 2010/2011, with NAV at end of 2011 at Rmb235mn. (3) CSPC XNW, whose major product is caffeine, a highly sought-after product globally, customers include international brand names, as well as global distributors. NPAT is Rmb45.24mn/Rmb66.02mn in 2010/2011, with NAV at end-2011 at Rmb71mn. We believe the acquisition should help CP reduce earnings volatility due to large bulk exposure. Our 12-mTP/estimates/rating are unchanged. Implications INVESTMENT LIST MEMBERSHIP Asia Pacific Sell List Coverage View: Neutral Wei Du, Ph.D +86(21)2401-8928 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with Li Yu companies covered in its research reports. As a result, +86(21)2401-8932 [email protected] Beijing Gao Hua Securities Company Limited investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research June 27, 2012 China Pharmaceutical Group (1093.HK) HK$2.05 Disclosure Appendix Reg AC I, Wei Du, Ph.D, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Wei Du, Ph.D: China Healthcare. China Healthcare: Beijing SL Pharmaceutical, Biosensors International Group, China Kanghui Holdings, China Medical System Holdings, China NT Pharma Group Company, China Nepstar Chain Drugstore, China Pharmaceutical Group, China Resources Sanjiu Pharmaceutical, China Shineway Pharmaceutical Group, Chongqing Lummy Pharmaceutical, Guangdong By-health Biotechnology Co., Guangxi Wuzhou Zhongheng Group, Guangzhou Pharmaceutical (H), Guizhou Yibai Pharmaceutical, Hualan Biological Engineering, Jiangsu Hengrui Medicine Co., Jiangsu NHWA Pharmaceutical Co., Jiangsu Yuyue Medical Equipment & Supply, Kunming Pharmaceutical, Lepu Medical Technology, Microport Scientific, Mindray Medical International, Shandong Dong-E E-Jiao Co., Shandong Weigao Group, Shanghai Kehua Bio-Engineering Co., Shanghai Pharmaceuticals Holding (A), Shanghai Pharmaceuticals Holding (H), Shenzhen Hepalink Pharmaceutical Co., Shinva Medical Instrument, Sihuan Pharmaceutical Holdings Group, Simcere Pharmaceutical Group, Sino Biopharmaceutical, Sinopharm Group Co., The United Laboratories International Holdings, Tianjin Tasly Pharmaceutical Co., WuXi PharmaTech Cayman, Wuhan Humanwell Healthcare (Group) Co., Yunnan Baiyao Grp Co., Zhejiang Hisun Pharmaceutical Co., Zhejiang Huahai Pharmaceutical Co., Zhejiang NHU Co. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: China Pharmaceutical Group (HK$2.05) Goldman Sachs Global Investment Research 2 June 27, 2012 China Pharmaceutical Group (1093.HK) HK$2.05 Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 48% 41% 36% As of April 1, 2012, Goldman Sachs Global Investment Research had investment ratings on 3,507 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Price target and rating history chart(s) China Pharm aceutical Group (1093.HK) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history 8.00 2.1 24,000 5.3 1.2 7.00 4.63 1.5 22,000 6.00 4.1 3.7 20,000 5.00 4.00 18,000 5.8 4.7 16,000 3.00 4.56 4.9 3.9 3.3 4.6 2.00 14,000 4.2 1.00 12,000 1.4 0.00 10,000 e Jun 9 Aug 26 Mar 16 Sep 5 e N S N S M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 2009 2010 2011 2012 Index Pric Stock Pric Stock Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2012. Rating Apr 1, 2009 N Covered by Wei Du, Ph.D Apr 8, 2009 to B from N Pr ic e t ar g et Price target at removal Not covered by current analyst Hang Seng Index The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets. Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. 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