Wednesday, March 23, 2016
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
China Traditional Chinese Medicine (570 HK) Milo Liu Hayden Zhang (852) 3189 6711 (852) 3189 6754 FY15 missed on sluggish TCM segment [email protected] [email protected] ■ We tuned down our earnings forecasts by -5% both in FY16E/17E WHAT’S NEW ■ Operating environment still tough in the near-term EPS & TP revised down ■ Current share price weakness possess a good entry point BUY Sluggish TCM segment despite strong top-line growth Revenue was RMB3,709mn in FY15, +40% from RMB2,650mn in FY14. The growth Previous BUY was mainly attributable to the full consolidation of TCM granules business from Price HK$4.07 Tianjiang starting from mid-Oct 2015. On the other hand, TCM business faced a 12-month Target Price significant slowdown during the period, came in at RMB2,731mn, +3% vs. HK$5.8 (+42.5%) RMB2,650mn in FY14 (restated). This was mainly due to overall industry slowdown as (Potential upside) well as change in pricing mechanism (switched to low ex-factory price from high, +9% Previous HK$6.3 if not changed). Tianjiang revenue contribution was c.RMB979mn during the period.
Weaker FY16E guidance by management Price Performance Management expects another 2-3 years before the government to fully open up the (%) 40 570 HSI Index granule market. Meanwhile, the management tuned down its guidance and eyeing 15%-20% both top-line and bottom-line growth in FY16E for Tianjiang amid overall 20 slowdown to the sector, which is lower than the previous 20% guidance. For the CTCM 0 standalone business, management expects the growth rate in FY16E to be better than the industry growth at c.7% in 2015. Management also indicated TCM growth; TCM -20 service sector and granule market (especially on quality) would be the key focus in the future. -40 Mar/15 Jul/15 Nov/15 Mar/16
Further earnings revision for FY16E/17E/18E Source: Bigdata We revised down our earnings forecasts for FY16E/17E/18E on: 1) slower- than- % 1m 6m 12m expected FY15 growth; 2) uncertainties from provincial tendering as well as the price 570 HK (0.0) (20.4) (8.4) negotiation. We expect consolidated top-line to grow at 102%/13%/12% in HSI 7.3 (4.9) (15.1)
FY16E/17E/18E, and the strong FY16E growth will be mainly driven by the full consolidation. We estimate diluted EPS to grow at 60%/15%/16% during the period as Industry: Healthcare a result of growth in earnings and the share base dilution arising from the equity Hang Seng Index 20,667 financing for the acquisition. HSCEI 8,900 Key Data Reiterate our BUY rating with TP revised-down to HK$5.8 52-week range (HK$) 3.87-7.03 The stock price is currently trading at 12.8x FY16E P/E, close to -2SD from the Market cap (HK$ mn) 18,249 historical average, which we believe is attractive, while other peers are trading at 15x- Avg. daily volume (mn) 10.27 20x FY16E P/E and close to 1.0x PEG. Our TP suggests +43% upside to the current BVPS (HK$) FY15 2.37 price, which implies 18x FY16E P/E. Risks: 1) further price erosions; 2) high SG&A Shareholdings Structure expenses; 3) RMB depreciation; and 4) competition from its peers. Sinopharm Group 37.6% Bin Yang 8.4% Xiaochun Wang 8.4%
Financials Free float 38.6% Related Research RMB mn 2014A 2015A 2016E 2017E 2018E Healthcare Sector Strategy and FY15E Preview – Sector Revenue 2,650 3,709 7,502 8,489 9,537 re-rating after the tendering in 2H16, March 11, 2016 90.0% 40.0% 102.3% 13.1% 12.4% Growth (%) China Traditional Chinese Medicine (570 HK) – Business Net profit 413 622 1,209 1,388 1,608 update and revisiting our forecasts, January 15, 2016
108.1% 50.5% 94.4% 14.8% 15.8% Growth (%) China Traditional Chinese Medicine (570 HK) – Best of EPS 0.16 0.17 0.27 0.31 0.36 both worlds, September 22, 2015
DPS (HK$) 0.00 0.00 0.00 0.00 0.00 P/E (x) 21.2 20.5 12.8 11.1 9.6 P/B (x) 2.7 1.3 1.5 1.3 1.1 ROE (%) 12.7% 5.3% 11.5% 11.5% 11.7% Sources: Company data, 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, March 23, 2016
Focus charts
Figure 1: TCM market size (RMB bn) Figure 2: CCMG market size (RMB bn)
3,000 TCM Market Size YoY 30% TCM granules Market Size YoY 28% 25 60% 56% 2,500 50% 20 49% 20% 18% 2,000 20% 17% 20% 40% 15 36% 17% 1,500 16% 30% 15% 26% 25% 14% 10 24% 1,000 10% 23% 21% 20% 20% 5 500 10%
0 0% 0 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Sources: Euromonitor, CMS (HK) Sources: Euromonitor, CMS (HK)
Figure 3: Margins and forecasts (%) Figure 4: CAPEX and forecasts (RMB mn) 70% 61.5% 700 CAPEX CAPEX as % of sales 12% 59.2% 59.1% 60% 54.9% 54.7% 54.6% 600 9.7% 620 10% 50% 8.9% 500 541 8% 7.0% 40% 7.0% 400 6% 30% 4.8% 21.4% 21.3% 21.6% 300 19.6% 327 17.8% 18.8% 20% 3.5% 4% 200 16.8% 16.1% 16.4% 16.9% 10% 14.2% 15.6% 100 2% 100 95 0% 68 2013 2014 2015 2016E 2017E 2018E 0 0% Gross Margin Operating Margin Net Profit Margin 2012 2013 2014 2015E 2016E 2017E Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates Note: The increase in CAPEX in FY15E is driven by the recent establishment of a TCM healthcare complex in Foshan and Chongqing; a new orthopedics TCM production base in Guizhou.
Figure 5: Efficiency and forecasts (days) Figure 6: Cash position and forecasts (RMB mn)
500 700 666
400 600 182 300 500 137 228 145 440 200 145 149 149 166 400 350 98 100 201 95 154 153 79 130 122 78 122 300 0 2012 2013 2014 2015E 2016E 2017E 200 173 (100) (63) 134 125 100 (200) (200) (180) (218) (193) (192) (300) 0 AR days AP days Inv days Cash conversion cycle 2012 2013 2014 2015E 2016E 2017E
Sources: Company, CMS (HK) estimates Sources: Company, CMS (HK) estimates, we assume company to gradually payback its debt starting FY16E.
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Financial Analysis
We revisit our financial forecasts by looking into CTCM and Tianjiang Pharma separately.
CTCM
FY16E top-line trajectory might be weaker than our prior expectation. We expect the core business of CTCM to slow down to 7% for FY16E-17E amid the sector-wise slowdown, as the single-digit growth would likely to become the new norm for the healthcare industry as well as TCM sector in the upcoming years. We expect gross margin of CTCM to stabilize going forward. Gross margin was trending down in 1H15 due to: 1) retail prices of certain drugs trimmed as a result of change in accounting treatment from high ex-factory price to low ex-factory price; and 2) increase in raw material prices to be in better accordance with the higher industry standard imposed by the government. We believe this dip is transitory as we expect the synergy effect from the existing products to offset the fluctuations in raw material prices in the upcoming years and the margin to stablilize going forward.
Figure 7: CTCM margin trend and forecasts 70% 60.9% 59.2% 59.4% 59.4% 59.4% 59.4% 60%
50%
40%
30%
19.6% 19.7% 20.2% 20.9% 17.8% 17.8% 20%
17.9% 15.2% 16.4% 10% 14.2% 13.3% 14.7%
0% 2013 2014 2015 2016E 2017E 2018E Gross Margin Operating Margin Net Profit Margin Sources: Company, CMS (HK) estimates
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Tianjiang Pharma
We expect Tianjiang to deliver 18%/13%/14% bottom-line growth in FY15E-FY17E, as we believe: 1) Tianjiang is well-positioned in the fast-growing concentrated TCM granule market; and 2) increase in demand of its principal products. We expect gross margin to largely stay put in the upcoming years, as we believe: 1) raw materials have been trending down since FY14 and we are not expecting a dramatic rebound anytime soon; 2) the company will implement certain measures to hedge this unfavorable risk; and 3) potential platform synergy after consolidated with CTCM. We are a bit conservative compared with the management guidance of c.20% and 15%-20% growth in FY15E/16E.
Figure 8: Tianjiang Income Statement (RMB’000) RMB '000 2012A 2013A 2014A 2015E 2016E 2017E Total Revenue 1,891,550 2,496,931 3,128,766 3,817,095 4,580,513 5,359,201 Growth - 32% 25% 22% 20% 17% Cost of Sales (787,078) (1,176,120) (1,461,927) (1,794,034) (2,198,646) (2,572,416) Gross Profit 1,104,472 1,320,811 1,666,839 2,023,060 2,381,867 2,786,784 Margin 58% 53% 53% 53% 52% 52% Other income and losses (5,028) 3,287 (9,870) - - - Distribution and selling costs (372,710) (505,670) (674,338) (847,395) (1,030,616) (1,232,616) % of revenue 20% 20% 22% 22% 23% 23% Administrative expenses (121,993) (179,474) (219,742) (268,085) (321,702) (376,392) % of revenue 6% 7% 7% 7% 7% 7% Finance costs - - (670) - - - PBT 604,741 638,954 762,219 907,580 1,029,549 1,177,777 Income tax expenses (87,834) (95,597) (110,499) (136,137) (154,432) (176,666) Margin 15% 15% 14% 15% 15% 15% Net profit 516,907 543,357 651,720 771,443 875,117 1,001,110 Growth - 5% 20% 18% 13% 14%
Sources: Company, CMS (HK) estimates
Figure 9: Tianjiang summarized financial ratios 2012A 2013A 2014A 2015E 2016E 2017E Operating profit margin 58.4% 52.9% 53.3% 53.0% 52.0% 52.0% Tax rate 14.5% 15.0% 14.5% 15.0% 15.0% 15.0% Net margin 27.3% 21.8% 20.8% 20.2% 19.1% 18.7% Return on assets 26.1% 19.9% 19.0% 17.1% 16.0% 14.8% Return on equity 33.7% 26.9% 25.4% 23.1% 20.8% 19.2% Return on investment capital 33.0% 26.5% 25.4% 23.1% 20.8% 19.2% Total asset turnover - 0.2x 0.2x 0.2x 0.2x 0.2x Capex as % of sales 9.2% 9.3% 8.3% 8.3% 8.3% 8.3% Current ratio 4.0x 3.0x 3.2x 3.0x 3.4x 3.4x Quick ratio 2.2x 1.5x 1.9x 2.3x 2.4x 2.6x Net debt to equity 2% 1% 0% 0% 0% 0%
Sources: Company, CMS (HK) estimates
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Consolidated (CTCM+Tianjiang)
Figure 10: Revenue breakdown (RMB’000) RMB '000 2013 2014 1H15 2H15 2015 2016E 2017E 2018E Revenue model Total sales 1,394,613 2,650,454 1,422,067 2,287,339 3,709,406 7,502,344 8,488,617 9,537,155 YoY % 48% 90% 15% 62% 40% 102% 13% 12% CTCM Business Xianling Gubao (仙灵骨葆) 207,340 850,358 472,148 390,040 862,188 874,183 886,344 898,675 YoY % - 310% 8% -6% 1% 1% 1% 1% Jingshu Granule (颈舒) 38,238 200,534 121,283 103,629 224,912 247,403 277,092 318,655 YoY % - 424% 36% -7% 12% 10% 12% 15% Moisturizing & Anti-Itching Capsule (润燥止痒胶囊) 30,942 158,455 100,740 101,763 202,503 249,079 298,894 343,729 YoY % - 412% 42% 16% 28% 23% 20% 15% Zaoren Anshen Capsule (枣仁安神胶囊) 8,364 57,909 34,781 36,402 71,183 81,149 90,886 98,157 YoY % - 592% 28% 19% 23% 14% 12% 8% Fengshi Gutong Capsule (风湿骨痛胶囊) 8,212 52,790 39,560 34,111 73,671 95,772 116,842 134,369 YoY % - 543% 61% 21% 40% 30% 22% 15% Bi Yan Kang (鼻炎康) 215,338 255,841 97,466 71,240 168,706 168,706 168,706 168,706 YoY % -3% 19% -7% -53% -34% 0% 0% 0% Yu Ping Feng (玉屏风) 218,459 250,049 164,127 107,012 271,139 325,367 383,933 422,326 YoY % 31% 14% 51% -24% 8% 20% 18% 10% Sheng Tong Ping (圣通平) 90,231 87,303 42,758 56,756 99,514 94,538 89,811 85,321 YoY % 2% -3% -20% 69% 14% -5% -5% -5% Gaode (高德) 61,066 87,113 34,582 24,743 59,325 53,393 48,053 43,248 YoY % 9% 43% -16% -46% -32% -10% -10% -10% Others (其他) 516,423 650,102 314,622 382,751 697,373 732,242 768,854 807,296 YoY % -10% 26% 11% 4% 7% 5% 5% 5% Sub-Total 1,394,613 2,650,454 1,422,067 1,308,447 2,730,514 2,921,831 3,129,416 3,320,482 YoY % 48% 90% 15% -7% 3% 7% 7% 6%
Tianjiang Business Tianjiang Granule Business - - N.A. N.A. 978,892 4,580,513 5,359,201 6,216,673 YoY % n.a. n.a. 17% 16%
Sources: Company, CMS (HK) estimates
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Financial Model (CTCM+Tianjiang)
Figure 11: Income Statement (Consolidated, RMB’000) RMB '000 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total revenue 1,394,613 2,650,454 1,422,067 2,287,339 3,709,406 7,502,344 8,488,617 9,537,155 Cost of sales (568,834) (1,007,065) (565,362) (950,091) (1,515,453) (3,384,383) (3,842,395) (4,331,520) Gross profit 825,779 1,643,389 856,705 1,337,248 2,193,953 4,117,961 4,646,221 5,205,634 SG&A expenses (576,937) (1,057,251) (537,192) (845,595) (1,382,787) (2,450,926) (2,770,021) (3,075,104) Selling costs (404,629) (903,418) (445,484) (750,152) (1,195,636) (1,942,227) (2,199,606) (2,439,261) General and admin expenses (ex. R&D) (126,361) (153,833) (91,708) (95,443) (187,151) (508,699) (570,415) (635,843) Research and development expenses (45,947) (67,727) (31,566) (80,758) (112,324) (61,358) (65,718) (69,730) Operating income 248,842 518,411 287,947 410,895 698,842 1,605,676 1,810,482 2,060,800 Other income (net) 16,167 31,905 13,402 31,008 44,410 25,342 27,143 28,800 Finance costs (27,434) (61,197) (10,147) 36,265 26,118 (78,251) (54,971) (24,209) EBITDA 333,290 669,414 370,610 538,515 909,125 1,894,088 2,131,615 2,418,104 Profit before taxes 237,575 489,119 291,202 478,168 769,370 1,552,768 1,782,654 2,065,391 Income tax (38,218) (70,386) (46,973) (71,355) (118,328) (232,915) (267,398) (309,809) Tax rate 16% 14% 16% 15% 15% 15% 15% 15% Minority interest (894) 1,544 7,326 (25,232) (17,906) (111,140) (127,141) (147,484) Net income 198,463 413,090 223,336 398,356 621,692 1,208,713 1,388,115 1,608,098 Basic EPS 0.0968 0.1630 0.0741 0.1713 0.2453 0.2696 0.3096 0.3587 Diluted net income 198,463 413,090 223,336 398,356 621,692 1,208,713 1,388,115 1,608,098 Diluted EPS 0.0968 0.1630 0.0741 0.0946 0.1686 0.2696 0.3096 0.3587 Diluted weighted average shares ('000) 2,050,558 2,533,899 3,015,543 4,358,203 3,686,873 4,483,748 4,483,748 4,483,748
Margins 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Gross margin 59.2% 62.0% 60.2% 58.5% 59.1% 54.9% 54.7% 54.6% SG&A 41.4% 39.9% 37.8% 37.0% 37.3% 32.7% 32.6% 32.2% R&D 3.3% 2.6% 2.2% 3.5% 3.0% 0.8% 0.8% 0.7% Operating margin 17.8% 19.6% 20.2% 18.0% 18.8% 21.4% 21.3% 21.6% Other income 1.2% 1.3% 0.4% 1.2% 0.9% 0.4% 0.4% 0.3% Other income/(expenses) 0.0% -0.1% 0.5% 0.1% 0.3% -0.1% 0.0% 0.0% Profit before tax margin 17.0% 18.5% 20.5% 20.9% 20.7% 20.7% 21.0% 21.7% Net margin 14.2% 15.6% 15.7% 17.4% 16.8% 16.1% 16.4% 16.9%
YOY% 2013A 2014A 1H15A 2H15A 2015A 2016E 2017E 2018E Total revenue 35% 90% 15% 62% 40% 102% 13% 12% Gross profit 46% 99% 13% 51% 34% 88% 13% 12% Selling costs 72% 123% 10% 51% 32% 62% 13% 11% General and admin expenses (ex. R&D) 52% 22% 20% 24% 22% 172% 12% 11% Research and development expenses 32% 47% 6% 113% 66% -45% 7% 6% Operating income 18% 108% 16% 52% 35% 130% 13% 14% Profit before taxes 10% 106% 29% 81% 57% 102% 15% 16% Net income 18% 108% 21% 74% 50% 94% 15% 16% Diluted EPS 2% 68% 2% 5% 3% 60% 15% 16% Diluted weighted average shares 15% 24% 19% 45% 46% 22% 0% 0%
Sources: Company, CMS (HK) estimates
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Figure 12: Changes to our model (RMB’000) 2015 2016E 2017E 2018E RMB '000 Actual Before After Delta % change Before After Delta % change Before After Delta % change Total Revenue 3,709,406 7,770,433 7,502,344 (268,089) -3% 8,837,558 8,488,617 (348,941) -4% 9,956,427 9,537,155 (419,273) -4% Cost of sales (1,515,453) (3,474,772) (3,384,383) 90,389 -3% (3,963,932) (3,842,395) 121,536 -3% (4,480,090) (4,331,520) 148,570 -3% Gross profit 2,193,953 4,295,661 4,117,961 (177,700) -4% 4,873,626 4,646,221 (227,405) -5% 5,476,337 5,205,634 (270,703) -5% SG&A expenses (1,382,787) (2,551,728) (2,450,926) 100,801 -4% (2,899,478) (2,770,021) 129,457 -4% (3,227,720) (3,075,104) 152,615 -5% Selling costs (1,195,636) (2,025,870) (1,942,227) 83,644 -4% (2,307,429) (2,199,606) 107,823 -5% (2,566,720) (2,439,261) 127,459 -5% General and Admin expenses (187,151) (525,857) (508,699) 17,158 -3% (592,050) (570,415) 21,634 -4% (661,000) (635,843) 25,156 -4% R&D Expenses (112,324) (66,988) (61,358) 5,630 -8% (73,046) (65,718) 7,328 -10% (78,535) (69,730) 8,805 -11% Operating income/loss 698,842 1,676,945 1,605,676 (71,268) -4% 1,901,102 1,810,482 (90,620) -5% 2,170,083 2,060,800 (109,283) -5% Other income (net) 44,410 27,730 25,342 (2,388) -9% 30,237 27,143 (3,095) -10% 32,510 28,800 (3,710) -11% Finance costs 26,118 (78,174) (78,251) (77) 0% (54,743) (54,971) (228) 0% (23,755) (24,209) (454) 2% Profit Before Taxes 769,370 1,626,501 1,552,768 (73,733) -5% 1,876,597 1,782,654 (93,943) -5% 2,178,837 2,065,391 (113,447) -5% Income Tax (118,328) (243,975) (232,915) 11,060 -5% (281,490) (267,398) 14,091 -5% (326,826) (309,809) 17,017 -5% Tax Rate 15% 15% 15% 0% 0% 15% 15% 0% 0% 15% 15% 0% 0% Minority interest (17,906) (111,140) (111,140) 0 (127,141) (127,141) 0 (147,484) (147,484) 0 Net Income 621,692 1,271,386 1,208,713 (62,673) -5% 1,467,966 1,388,115 (79,851) -5% 1,704,528 1,608,098 (96,430) -6% Net Income (Adjusted) 621,692 1,271,386 1,208,713 (62,673) -5% 1,467,966 1,388,115 (79,851) -5% 1,704,528 1,608,098 (96,430) -6% Basic EPS (RMB) 0.2453 0.2836 0.2696 (0.0140) -5% 0.3274 0.3096 (0.0178) -5% 0.3802 0.3587 (0.0215) -6% Diluted Net Income 621,692 1,271,386 1,208,713 (62,673) -5% 1,467,966 1,388,115 (79,851) -5% 1,704,528 1,608,098 (96,430) -6% Diluted EPS (RMB) 0.169 0.284 0.270 (0.014) (0.049) 0.327 0.310 (0.018) (0.054) 0.380 0.359 (0.022) (0.057) Basic Weighted Average Shares 2,533,899 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0% Diluted Weighted Average Shares 3,686,873 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0%
Margins 2015A 2016E b.p. 2017E b.p. 2018E b.p. Gross margin 59.1% 55.3% 54.9% (39) 55.1% 54.7% (41) 55.0% 54.6% (42) SG&A 37.3% 32.8% 32.7% (17) 32.8% 32.6% (18) 32.4% 32.2% (18) R&D 5.0% 6.8% 6.8% 1 6.7% 6.7% 2 6.6% 6.7% 3 Operating margin 18.8% 21.6% 21.4% (18) 21.5% 21.3% (18) 21.8% 21.6% (19) Other income 0.9% 0.4% 0.4% (2) 0.4% 0.4% (2) 0.4% 0.3% (3) Profit before tax margin 20.7% 20.9% 20.7% (23) 21.2% 21.0% (23) 21.9% 21.7% (23) Minority interest as % of PBT 2.3% 6.8% 7.2% 32 6.8% 7.1% 36 6.8% 7.1% 37 Net margin 16.8% 16.4% 16.1% (25) 16.6% 16.4% (26) 17.1% 16.9% (26)
YOY% Total Revenue 40% 110% 102% (808) 14% 13% (59) 13% 12% (31) Gross profit 34% 99% 88% (1,090) 13% 13% (63) 12% 12% (33) Operating income/loss 57% 135% 102% (3,343) 15% 15% (57) 16% 16% (25) Net Income 50% 124% 94% (2,938) 15% 15% (62) 16% 16% (27) Diluted EPS 3% 85% 60% (2,465) 15% 15% (62) 16% 16% (27) Sources: Company, CMS (HK) estimates
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Valuation
DCF Analysis
Our DCF-based valuation suggests a 12-month target price of HK$5.8. The key assumptions are as follows: 1) We set risk free rate at 3.0%;
2) We assume equity risk premium at 9.00% and beta of 0.87. This gives us the company’s cost of equity at 10.8%;
3) Assuming CTCM borrows at 6% interest rate and its effective tax rate remains at 15.0%, we estimate the weighted average cost of capital (WACC) to be 9.8%.
4) We set the terminal growth rate at 2%.
Figure 13: DCF analysis COE WACC 9.3% 9.3% 9.3% 10.3% 10.3% 10.3% 11.3% 11.3% 11.3% Risk Free rate 3.0% Perpetuity 1% 2% 3% 1% 2% 3% 1% 2% 3%
Beta 0.87 2016E-2025E $11,726,953 $11,726,953 $11,726,953 $11,521,656 $11,521,656 $11,521,656 $11,321,336 $11,321,336 $11,321,336
Equity Risk premium 9.0% 2026E-2030E $5,890,335 $5,890,335 $5,890,335 $5,673,783 $5,673,783 $5,673,783 $5,466,396 $5,466,396 $5,466,396
Adjusted industry risk premium 0% Terminal $5,472,859 $6,283,135 $7,350,232 $4,273,622 $4,835,299 $5,550,649 $3,379,518 $3,779,570 $4,275,903
COE 10.8% NAV $23,090,147 $23,900,423 $24,967,520 $21,469,061 $22,030,738 $22,746,087 $20,167,250 $20,567,302 $21,063,635
Share count ('000) 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748
WACC NAV/share $5.15 $5.33 $5.57 $4.79 $4.91 $5.07 $4.50 $4.59 $4.70
WACC = Re x E/V + Rd x (1-corporate tax rate) x D/V 1.18 HKD/RMB $6.08 $6.29 $6.57 $5.65 $5.80 $5.99 $5.31 $5.41 $5.54
Re 10.79%
E 11,837,761
D 2,450,359
V 14,288,120
Rd 6%
Tc 15% WACC 9.8% Sources: Company, CMS (HK) estimates
We use our sensitivity analysis to determine the high end (HK$6.6, implying 21x 2016E P/E), the midpoint (HK$5.8, corresponding 18x 2016E P/E) and the low end (HK$5.3, implying 17x 2016E P/E). Parameters include WACC (9.3%/10.3%/11.3%) and terminal rate (1%/2%/3%).
Figure 14: Sensitivity analysis Terminal rate
WACC 1.0% 2.0% 3.0% 9.3% $6.1 $6.3 $6.6
10.3% $5.7 $5.8 $6.0
11.3% $5.3 $5.4 $5.5 Sources: Company, CMS (HK) estimates
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P/E Analysis
Our DCF based target price of HK$5.8 is corresponding to 18x 16E P/E. We compare it with two sets of comparables: 1) A-share leading names, such as Yunnan Baiyao (000538 CH), which are currently trading at 19x FY16E P/E; and 2) Hong Kong listed peers such as Livzon Pharma (1513 HK) and Tongrentang CM (8138 HK), all trading at north of 15x FY16E P/E. We believe a premium vs its peers is justified, given: 1) bellwether in the TCM industry; 2) Tianjiang acquisition to tap into the fast growing CCMG market; and 3) SOE platform allows the company to leverage this resource in the long run. The stock is currently trading at 12.8x FY16E P/E, close to 2 standard deviations below average for the past 3 years which we belive is attractive.
Figure 15: Peers valuation comparison Name 中文名 Stock Code Mkt Cap –––––––P/E––––––– –––––––P/B––––––– –––––PEG–––––– Gross Margin (%) (HK$ mn) 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E CTCM 中国中药 570 HK 18,249 21.2 20.5 12.8 2.7 1.3 1.5 0.78 0.73 0.43 62.0% 59.1% 54.9% A-share peers
YUNNAN BAIYAO-A 云南白药 000538 CH 75,271 26.2 21.8 18.6 5.9 4.6 3.7 1.6 1.4 1.2 29.8 29.9 29.8 TASLY PHARMAC-A 天士力 600535 CH 49,462 31.1 26.4 22.3 8.8 6.3 5.3 1.6 1.3 1.1 37.0 38.7 39.7 BEIJING TONGRE-A 同仁堂 600085 CH 47,468 38.5 45.8 40.1 5.3 6.4 5.3 2.2 2.6 2.3 42.6 45.4 45.0 GUANGZHOU BAIY-A 白云山 600332 CH 33,389 20.3 21.7 19.1 3.1 2.7 3.0 1.5 1.6 1.4 34.7 36.0 36.6 JIANGSU KANION-A 康缘药业 600557 CH 11,399 36.1 24.6 20.0 4.7 3.4 2.9 1.8 1.2 1.0 74.4 75.1 74.2 Simple average 30.4 28.1 24.0 5.6 4.7 4.0 1.7 1.6 1.4
Weighted average 29.6 28.2 24.3 5.9 5.0 4.3 1.7 1.7 1.4
Hong Kong peers BAIYUNSHAN PH-H 白云山 874 HK 33,390 20.3 14.7 13.1 3.1 1.6 1.6 1.6 1.2 1.0 34.7 33.7 36.6 LIVZON PHARM-H 丽珠集团 1513 HK 18,047 28.4 17.7 15.1 4.0 2.5 2.2 1.4 0.9 0.8 60.9 60.5 60.4 TONG REN TANG-H 同仁堂科技 1666 HK 15,139 22.3 23.3 20.3 2.9 3.3 2.6 3.6 3.7 3.3 48.3 n.a. 50.1 TONGRENTANGCM 同仁堂国药 8138 HK 6,856 30.8 19.4 16.7 6.0 3.9 3.2 2.2 1.4 1.2 71.4 68.6 69.5 CHINA SHINEWAY 神威药业 2877 HK 7,774 11.1 9.6 9.4 1.6 1.2 1.2 n.a. n.a. n.a. 66.3 65.5 65.5 Simple average 22.6 16.9 14.9 3.5 2.5 2.2 2.2 1.8 1.6 Weighted average 22.5 16.9 14.8 3.7 2.7 2.3 1.8 1.5 1.3
Sources: Bloomberg, CMS (HK), as of 22 Mar 2016
Figure 16: Rolling 12m forward P/E band
Price (HKD) 26X 8 23X 7
19X 6
15X 5
4 11X 3
2
1
Jul-13 Jul-14 Jul-15
Oct-15 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15
Jan-14 Jan-15 Jan-16 Jan-13 Sources: Bloomberg, CMS (HK)
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Figure 17: Peers valuation comparison
Mkt Cap PE PB Name 中文名 Code Currency (million) 15E 16E 17E 15E 16E 17E JIANGSU HENGRUI MEDICINE C-A 恒瑞医药 600276 CH RMB 92,365 42.2 33.3 26.5 8.8 7.3 5.8 YUNNAN BAIYAO GROUP CO LTD-A 云南白药 000538 CH RMB 63,026 21.8 18.6 16.0 4.6 3.7 3.0 BEIJING TONGRENTANG CO-A 同仁堂 600085 CH RMB 39,745 45.8 40.1 36.5 6.4 5.3 4.7 SHANGHAI FOSUN PHARMACEUTI-A 复星医药 600196 CH RMB 45,422 19.0 16.0 13.2 2.5 2.1 1.8 TASLY PHARMACEUTICAL GROUP-A 天士力 600535 CH RMB 41,415 26.4 22.3 18.6 6.3 5.3 4.5 HUADONG MEDICINE CO LTD-A 华东医药 000963 CH RMB 33,781 26.7 23.0 19.8 9.4 5.6 4.4 HUNAN ER-KANG PHARMACEUTI -A 尔康制药 300267 CH RMB 30,892 53.6 39.3 30.2 9.9 8.1 6.5 JOINTOWN PHARMACEUTICAL-A 九州通 600998 CH RMB 27,752 39.8 33.9 28.2 3.4 3.2 3.0 AIER EYE HOSPITAL GROUP CO-A 爱尔眼科 300015 CH RMB 28,667 66.6 49.3 36.8 11.2 9.7 7.9 SHENZHEN SALUBRIS PHARM-A 信立泰 002294 CH RMB 29,132 22.6 19.4 16.2 6.5 5.3 4.4 LEPU MEDICAL TECHNOLOGY-A 乐普医疗 300003 CH RMB 32,256 53.9 40.7 31.3 8.0 6.9 5.9 HUALAN BIOLOGICAL ENGINEER-A 华兰生物 002007 CH RMB 25,403 38.6 32.0 26.2 6.4 5.5 4.7 HARBIN GLORIA PHARMACEUTIC-A 誉衡药业 002437 CH RMB 20,753 30.0 23.0 18.9 n.a. n.a. n.a. CHINA RESOURCES SANJIU MED-A 华润三九 000999 CH RMB 21,996 17.1 17.2 15.6 2.8 2.5 2.2 SICHUAN KELUN PHARMACEUTIC-A 科伦药业 002422 CH RMB 21,254 n.a. n.a. n.a. 1.9 1.7 1.5 ZHEJIANG HUAHAI PHARMACEUT-A 华海药业 600521 CH RMB 20,288 45.6 34.4 25.3 5.7 5.1 4.4 JIANGSU YUYUE MEDICAL EQU-A 鱼跃医疗 002223 CH RMB 18,391 46.3 35.3 29.0 8.6 6.8 5.5 HAISCO PHARMACEUTICAL GROU-A 海思科 002653 CH RMB 17,608 47.9 39.8 35.4 n.a. 6.6 5.7 BEIJING TIANTAN BIOLOGICAL-A 天坛生物 600161 CH RMB 15,562 57.5 251.6 177.6 8.0 7.8 7.4 BEIJING SL PHARMACEUTICAL -A 双鹭药业 002038 CH RMB 16,890 25.3 23.2 19.7 4.6 3.9 3.5 ZHEJIANG CONBA PHARMACEUTI-A 康恩贝 600572 CH RMB 17,190 20.5 16.8 14.6 4.5 3.7 3.1 SHIJIAZHUANG YILING PHARMA-A 以岭药业 002603 CH RMB 15,163 32.4 27.2 22.2 3.1 2.8 2.5 TIANJIN CHASE SUN PHARM-A 红日药业 300026 CH RMB 15,087 25.3 20.0 16.8 4.5 3.7 2.8 GUIZHOU YIBAI PHARMACEUTIC-A 益佰制药 600594 CH RMB 12,821 30.2 20.9 16.2 3.1 2.7 2.3 BEIJING BEILU PHARMACEUTIC-A 北陆药业 300016 CH RMB 8,157 65.5 48.1 36.8 10.5 8.9 7.5 GUANGDONG ZHONGSHENG PHA-A 众生药业 002317 CH RMB 8,123 26.5 20.6 17.5 3.9 3.4 2.9 ZHEJIANG XIANJU PHARMA-A 仙琚制药 002332 CH RMB 7,250 n.a. n.a. n.a. n.a. n.a. n.a. INNER MONGOLIA FURUI MEDIC-A 福瑞股份 300049 CH RMB 6,017 67.2 49.7 33.1 6.0 5.4 4.7 HENAN LINGRUI PHARMACEUTIC-A 羚锐制药 600285 CH RMB 5,328 35.5 28.0 19.9 2.8 2.5 2.3 Simple Average 38.1 37.9 29.6 5.9 5.0 4.3 Weighted Average 35.1 32.6 26.0 5.9 5.1 4.2 Mkt Cap PE PB Name 中文名 Code Currency (million) 15E 16E 17E 15E 16E 17E SINOPHARM GROUP CO-H 国药控股 1099 HK HKD 88,132 19.9 17.0 14.6 2.4 2.2 1.9 SHANGHAI PHARMACEUTICALS-H 上海医药 2607 HK HKD 50,228 12.0 10.9 9.7 1.2 1.1 1.0 SIHUAN PHARMACEUTICAL HLDGS 四环医药 460 HK HKD 26,118 10.7 9.6 9.4 2.0 1.7 1.5 SINO BIOPHARMACEUTICAL 中国生物制药 1177 HK HKD 44,473 24.2 20.5 17.5 5.4 4.3 3.5 CSPC PHARMACEUTICAL GROUP LT 石药集团 1093 HK HKD 40,845 24.3 19.9 16.2 4.5 4.0 3.5 GUANGZHOU BAIYUNSHAN PHARM-H 白云山 874 HK HKD 33,391 14.7 13.1 11.6 1.6 1.6 1.7 3SBIO INC 三生制药 1530 HK HKD 25,908 35.5 26.0 20.1 4.0 3.6 3.1 CHINA MEDICAL SYSTEM HOLDING 康哲药业 867 HK HKD 26,564 21.3 16.7 13.6 4.2 3.3 2.8 SHANDONG WEIGAO GP MEDICAL-H 山东威高 1066 HK HKD 23,188 16.2 14.1 12.2 1.8 1.7 1.5 LUYE PHARMA GROUP LTD 绿叶制药 2186 HK HKD 19,727 20.4 17.0 13.9 2.8 2.4 2.1 CHINA TRADITIONAL CHINESE ME 中国中药 570 HK HKD 18,249 18.9 11.6 9.7 1.4 1.4 1.2 TONG REN TANG TECHNOLOGIES-H 同仁堂科技 1666 HK HKD 15,139 23.3 20.3 17.7 3.3 2.6 2.4 CHINA SHINEWAY PHARMACEUTICA 神威药业 2877 HK HKD 7,774 9.6 9.4 9.5 1.2 1.2 1.1 BEIJING TONG REN TANG CHINES 同仁堂国药 8138 HK HKD 6,856 19.4 16.7 14.4 3.9 3.2 2.8 SSY GROUP LTD 石四药集团 2005 HK HKD 6,947 15.2 13.3 11.8 2.0 1.9 1.7 BLOOMAGE BIOTECHNOLOGY 华熙生物科技 963 HK HKD 5,295 21.5 16.9 14.2 4.2 3.4 2.7 PHOENIX HEALTHCARE GROUP CO 凤凰医疗 1515 HK HKD 6,370 22.1 17.3 14.2 3.0 2.6 2.3 HUA HAN HEALTH INDUSTRY HOLD 华瀚健康 587 HK HKD 6,210 12.0 9.3 8.4 0.7 n.a. n.a. SHANGHAI FUDAN-ZHANGJIANG-H 复旦张江 1349 HK HKD 5,667 32.7 28.1 20.0 6.0 5.2 4.2 THE UNITED LABORATORIES INTE 联邦制药 3933 HK HKD 4,783 9.7 8.8 7.7 0.7 0.6 0.6 LEE'S PHARMACEUTICAL HLDGS 李氏大药厂 950 HK HKD 3,462 14.4 12.9 10.9 2.9 2.4 2.0 CONSUN PHARMACEUTICAL GROUP 康臣药业 1681 HK HKD 3,993 12.7 10.3 8.7 2.2 1.9 1.6 PW MEDTECH GROUP LTD 普华和顺 1358 HK HKD 2,743 10.7 9.3 7.7 1.0 0.9 0.8 CHINA PIONEER PHARMA HOLDING 中国先锋医药 1345 HK HKD 2,320 7.7 6.3 5.6 1.4 1.3 1.2 UNIVERSAL HEALTH INTERNATION 大健康国际 2211 HK HKD 1,740 3.8 3.2 2.8 n.a. n.a. n.a. Simple Average 17.3 14.3 12.1 2.7 2.4 2.1 Weighted Average 19.3 16.0 13.6 2.8 2.5 2.1 Sources: Bloomberg, CMS (HK), as of 22 Mar 2016
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Financial Summary
Balance Sheet Profit & Loss Statement RMB million FY14 FY15 2016E 2017E 2018E RMB million FY14 FY15 2016E 2017E 2018E Cash and ST investments 440 2,138 75 658 457 Revenue 2,650 3,709 7,502 8,489 9,537 Inventories 418 1,236 1,568 1,592 1,984 Cost of sales -1,007 -1,515 -3,384 -3,842 -4,332 Other current assets 1 101 3 3 3 Gross profit 1,643 2,194 4,118 4,646 5,206 Total Current Assets 2,094 6,873 4,733 4,796 6,195 Other incomes and expenses 32 44 25 27 29 Selling expenses -903 -1,196 -1,942 -2,200 -2,439 Property. plant & equipment 960 1,800 2,389 2,724 3,106 Administrative expenses -154 -187 -509 -570 -636 Other assets 76 179 179 179 179 Operating profit 518 699 1,606 1,810 2,061 Goodwill 1,191 5,390 5,390 5,390 5,390 Interest income 1 96 33 32 31 Deferred tax assets 48 126 71 71 71 Interest expense -63 -70 -111 -87 -55 Total Non-current Asset 3,237 11,357 10,511 10,845 11,225 Total Assets 5,332 18,229 15,245 15,641 17,420 PBT 489 769 1,553 1,783 2,065 Income tax -70 -118 -233 -267 -310 Trade and other payables 540 2,660 1,978 2,055 2,476 Net Profit 413 622 1,209 1,388 1,608 Bank and other loans 502 1,600 716 -484 -884 Current taxation 48 149 97 101 104 EBITDA 669 909 1,894 2,132 2,418 Other Current Liabilities 44 82 82 82 82 EPS (RMB) - Basic 0.16 0.25 0.27 0.31 0.36 Total Current Liabilities 1,134 4,491 2,873 1,753 1,777 EPS (RMB) - Diluted 0.16 0.17 0.27 0.31 0.36 DPS (RMB) 0.000 0.000 0.000 0.000 0.000 Long-term debt 671 850 850 850 850 Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% Deferred taxes 245 901 901 901 901 Total Non-current Liabilities 941 1,900 1,852 1,852 1,852 Financial Ratios Total Liabilities 2,075 6,391 4,724 3,605 3,629 FY14 FY15 2016E 2017E 2018E Growth (YoY) Non-equity reserves 0 0 0 0 0 Revenue 90.0% 40.0% 102.3% 13.1% 12.4% Minority interest 73 708 819 947 1,094 Gross profit 99.0% 33.5% 87.7% 12.8% 12.0% Common equity 3,184 11,129 9,701 11,089 12,697 Operating profit 108.3% 34.8% 129.8% 12.8% 13.8% Total Equity 3,257 11,838 10,520 12,036 13,791 Net profit 108.1% 50.5% 94.4% 14.8% 15.8% EPS 68.4% 3.4% 59.9% 14.8% 15.8% BPS (US) 1.29 2.64 2.35 2.68 3.08 Diluted weighted average shares 23.6% 45.5% 21.6% 0.0% 0.0%
Cashflow Statement Margin 2014 2015A 2016E 2017E 2018E RMB million FY14 FY15E 2016E 2017E 2018E Gross Margin 62.0% 59.1% 54.9% 54.7% 54.6% PBT 441 769 1,553 1,783 2,065 Operating Margin 19.6% 18.8% 21.4% 21.3% 21.6% Depreciation and amortization 119 167 263 294 329 Net Profit Margin 15.6% 16.8% 16.1% 16.4% 16.9% Finance cost 64 70 111 87 55 Interest income -2 -96 -33 -32 -31 Efficiency 2014 2015A 2016E 2017E 2018E Operating profit before change in WC 630 787 1,897 2,134 2,421 Inventory Days 145 145 151 150 151 Funds from other operating activities -252 516 -1,146 598 -1,180 Trade Receivable Days 155 130 158 121 120 Cash from operating activities 285 1,206 521 2,468 935 Account Payable Days 200 180 250 192 191
Capital expenditure -95 -309 -527 -603 -684 Financial Ratios 2014 2015A 2016E 2017E 2018E Acquisition of subsidiaries 0 -8,212 0 0 0 Current Ratio (x) 1.8 1.5 1.6 2.7 3.5 Cash from investing activities -81 -8,504 -495 -571 -653 Quick Ratio (x) 1.5 1.2 1.1 1.8 2.4 Net debt/equity 22.5% 2.6% 13.9% -2.4% -3.5% Long-term borrowings 750 1,400 0 0 0 ROA 7.7% 3.4% 7.9% 8.9% 9.2% Net proceeds from issue of shares 0 4,766 0 0 0 ROE 12.7% 5.3% 11.3% 11.4% 11.5% Reduction in long-term debt -822 0 0 -1,000 -400 Inc (Dec) in short-term borrowings 0 200 0 -200 0 Valuation Comparison 2014 2015A 2016E 2017E 2018E Cash from financing activities -110 8,960 -2,054 -1,314 -482 P/B (x) 2.7 1.3 1.4 1.3 1.1 P/E (x) 21.2 20.5 12.8 11.1 9.6
Net change in cash 94 1,662 -2,027 583 -201 Net cash - beginning balance 345 439 2,102 75 658 Net cash - ending balance 439 2,102 75 658 457
Sources: Company data, CMS (HK) estimates
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Investment Ratings
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Company Rating Definition BUY Expect stock to generate 10%+ return over the next 12 months NEUTRAL Expect stock to generate +10% to -10% over the next 12 months SELL Expect stock to generate loss of 10%+ over the next 12 months
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