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Sinopharm Group Bloomberg: 1099 HK EQUITY | Reuters: 1099.HK Refer to Important Disclosures at the End of This Report

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Sinopharm Group Bloomberg: 1099 HK EQUITY | Reuters: 1099.HK Refer to Important Disclosures at the End of This Report China / Hong Kong Company Focus Sinopharm Group Bloomberg: 1099 HK EQUITY | Reuters: 1099.HK Refer to important disclosures at the end of this report DBS Group Research . Equity 25 August 2015 BUY Upping efficiency to boost earnings Last Traded Price: HK$25.90 (HSI : 21,252) Price Target: HK$34 (31% upside) (Prev HK$43.6) 1H15 earnings beat expectations, thanks to persistent efforts Potential Catalyst: market share gain, state-owned enterpise reform • to cut admin & net interest cost Where we differ: our revenue growth assumption is more But revenue growth is decelerating due to public hospitals' conservative • Analyst budget control. Hence, we lowered earnings estimates by Mark KONG CFA, +852 2820 4619 5%/7% for 2016F/17F [email protected] Post-revision EPS CAGR (2014-17F) remains decent at 16%. • Price Relative Maintain BUY with TP revised to HK$34 HK$ Relative Index 1H15’s earnings was up 40.1 204 1H15 earnings beat expectations. 184 30.5% to Rmb1.9bn, 5% above consensus estimates thanks to 35.1 , 164 drop in admin cost and net financial cost as % of revenue (- 30.1 144 0.15/-0.14ppt). The sales was up by 17%, driven by market 25.1 124 share gain from smaller players. Net debt-to-equity ratio 20.1 104 increased from 28% (Dec-14) to 36% (Jun-15). Cash conversion 15.1 84 cycle (days) increased from 46 (1H14) to 52. Operating cash Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 inflow was stable at Rmb1.84bn (1H14: Rmb1.87bn). No Sinopharm Group (LHS) Relative HSI INDEX (RHS) interim DPS was proposed (1H14: nil). Forecasts and Valuation However, sales growth is decelerating. The pharmaceutical FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 200,131 229,150 262,377 300,422 manufacturing industry's sales growth has been decelerating EBITDA 8,899 10,659 12,188 13,929 (2013/14/1H15: 20%/13%/9%). Because >50% of drugs in Pre-tax Profit 5,935 7,612 8,819 10,169 China are sold to public hospitals and the Central government is Net Profit 2,875 3,684 4,267 4,920 controlling the expenses on public hospitals, which has affected Net Pft (Pre Ex) 2,875 3,685 4,269 4,923 their procurement power. This should continue to be a drag on EPS (RMB) 1.14 1.33 1.54 1.78 industry sales growth. As the largest drug distributor in China, EPS (HK$) 1.38 1.61 1.87 2.15 Sinopharm will be impacted. Accordingly, we lowered our sales EPS Gth (%) 27.8 16.9 15.8 15.3 growth estimates for 2015/16/17 by 3.5ppt each to 14.5%. Diluted EPS (HK$) 1.38 1.61 1.87 2.15 DPS (HK$) 0.37 0.44 0.50 0.58 Decent earnings growth to be maintained on persistent BV Per Share (HK$) 13.13 13.25 14.68 16.33 efforts to cut cost. Sinopharm is cutting two cost items: 1) PE (X) 18.7 16.0 13.8 12.0 Admin cost as % of sales. Thanks to better economies of scale, P/Cash Flow (X) 9.7 9.5 17.8 10.0 we believe this ratio will further drop. Thus, we lowered this P/Free CF (X) 56.7 12.7 30.7 13.1 ratio for 15F-17F by 0.02-0.11ppt; 2) Net interest cost as % of EV/EBITDA (X) 8.2 7.4 6.8 6.1 sales. DBS forecasts China’s interest rate to trend down. Hence, Net Div Yield (%) 1.4 1.7 2.0 2.2 P/Book Value (X) 2.0 1.9 1.8 1.6 we believe Sinopharm can further cut this ratio by continuous Net Debt/Equity (X) 0.3 0.2 0.2 0.2 re-financing. Thus, we lower this ratio for 16F/17F by 0.01- ROAE (%) 11.7 12.8 13.4 13.9 0.03ppt. All in, our earnings estimates for 16F/17F are down by 5%/7%. After the revision, EPS CAGR in 2014-17F remains Earnings Rev (%): (5.0) (7.2) decent at 16%. Consensus EPS 1.30 1.57 1.86 (RMB) Maintain BUY. In view of a decent EPS CAGR, we maintain our Other Broker Recs: B: 11 S: 0 H: 4 BUY call. Previously, we derived our TP on healthcare sector's PE + 10% premium. Based on the same methodology, we derived ICB Industry: Health Care TP PE and TP of 17x (16F PE) and HK$34. ICB Sector: Pharmaceuticals & Biotechnolog Principal Business: The largest distributor of, and a leading provider of supply chain services for, pharmaceutical and healthcare products in China. At A Glance Issued Capital (m shrs) 2,767 Source of all data: Company, DBSV, Thomson Reuters, HKEX Mkt. Cap (HK$m/US$m) 71,466 / 9,220 Major Shareholders CNPGC (%) 56.9 Free Float (%) 43.1 3m Avg. Daily Val. (US$m) 22.8 www.dbsvickers.com ed-TH/ sa- CW Company Focus Sinopharm Group INVESTMENT THESIS Profile Rationale The largest pharmaceutical distributor in China Solid earnings growth Further penetration into 2nd & 3rd tiers cities to drive above-industry sales growth Market share gain from smaller distributors amid industry consolidation Better economies of scale to enhance profit margin Share price catalysts ahead State owned enterprise reform to be a major share price catalyst in 2015 Potential to co-operate with e-commerce player. Valuation Risks Our TP of HK$34 is based on 17x 16F PE, representing 10% Price cut and high gearing premium to healthcare sector average. It deserves a This company is vulnerable to a fall in the price of its premium because 1) faster-than-industry sales growth; 2) its products. parent company (China National Pharmaceutical Group High gearing Corp) has been chosen by the central government to carry out reforms for major subsidiaries to strengthen its operations. Announcements of any progress can be a share price catalyst. Source: DBS Vickers Page 2 Company Focus Sinopharm Group PE band chart PB band chart Share Price (HK$) Share Price (HK$) 120 90 80 5.5x 100 54x 70 4.7x 80 44x 60 50 3.6x 60 34x 40 24x 2.6x 40 30 14x 20 1.6x 20 10 0 0 Jun-14 Feb-12 Apr-13 Jun-14 Sep-09 Nov-10 Feb-12 Sep-09 Apr-13 Aug-15 Nov-10 Aug-15 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Page 3 Company Focus Sinopharm Group Peer Table Mkt PE PE Yield Yield P/Bk P/Bk EV /EBITDA ROE ROE Price Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code HK $ HK$m Yr x x % % x x x x % % Distributor & Retailer Sinopharm Group 'H'* 1099 HK 25.9 71,668 Dec 16.0 13.8 1.7 2.0 1.9 1.8 7.4 6.8 12.8 13.4 Shanghai Pharms.Hldg. Co.'H' 2607 HK 15.76 42,377 Dec 12.1 10.8 2.1 2.3 1.1 1.1 10.4 9.5 9.7 10.0 Guangzhou Bysh.Phmhd.'H' 874 HK 18.06 23,317 Dec 14.1 12.5 1.6 1.6 2.2 1.9 22.7 20.3 14.7 13.5 China Med.Sy.Hdg.(Di) 867 HK 8.32 20,694 Dec 16.3 13.1 1.9 2.3 3.4 2.9 17.2 13.7 22.6 23.2 Beijing Tgrt.Chs.Mdcin. 8138 HK 8.05 6,739 Dec 18.4 15.4 1.6 2.0 3.8 3.2 17.8 14.6 22.5 22.9 China NT Pharma Gp.Co. 1011 HK 1.35 2,103 Dec 20.2 13.1 0.0 0.0 1.9 1.7 n.a. n.a. 9.9 14.4 China Pion.Pharma Hdg. 1345 HK 3.44 4,587 Dec 10.9 8.5 7.6 9.7 2.6 2.5 11.1 9.2 26.9 30.2 Universal Hlth.Intl.Gp. Hldg. 2211 HK 2.72 5,440 Dec 8.4 7.6 1.7 1.9 1.4 1.2 3.8 3.3 19.8 18.5 Average 14.6 11.8 2.3 2.7 2.3 2.0 12.9 11.0 17.4 18.2 Finished Drugs Sihuan Pharm.Hdg.Gp. 460 HK 4.41 45,706 Dec 17.7 14.7 2.0 2.8 3.7 3.2 14.0 11.6 22.8 23.8 Sino Biophm. 1177 HK 7.71 38,099 Dec 21.5 18.2 0.9 1.1 4.4 3.7 13.9 11.7 22.7 22.1 Tong Ren Tang Techs.'H' 1666 HK 10.24 13,115 Dec 20.5 18.1 1.9 2.2 2.8 2.6 10.5 9.4 14.2 14.7 Cspc Pharmaceutical Gp. 1093 HK 6.45 38,107 Dec 22.2 17.9 1.3 1.6 4.1 3.5 15.6 12.9 19.8 21.3 China Traditional Chinese Medicines 570 HK 4.78 20,487 Dec 20.8 12.8 0.3 0.3 1.6 1.5 14.4 7.5 9.7 11.6 Dawnrays Pharm.(Hdg.) 2348 HK 5.61 4,512 Dec 12.6 10.0 3.3 4.2 2.7 2.4 10.1 8.0 23.7 26.8 Lee'S Pharm.Hdg. 950 HK 10.12 5,932 Dec 23.6 20.2 1.1 1.2 5.0 4.1 22.5 20.1 21.0 19.6 Lansen Pharm.Hdg.* 503 HK 2.18 905 Dec 6.8 6.0 4.4 5.0 0.9 0.8 6.2 5.7 13.6 14.0 Shai.Fosun Pharm.(Group) 'H' 2196 HK 19 43,916 Dec 15.5 13.1 1.7 2.0 2.0 1.8 26.5 22.0 12.8 14.5 Consun Pharmaceutical Gp.* 1681 HK 4.93 4,930 Dec 15.0 12.0 0.7 0.9 2.5 2.1 9.2 6.5 17.6 19.0 Livzon Pharm.Group 'H' Susp - Susp.
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