The report quoted the Morgan Stanley (Daimo) report as saying that Jintian Pharmaceutical (02211-HK) is expected to use 1) to expand network coverage; 2) acquire retail pharmacies; 3) the contribution of the brand's high-margin products to drive gross margin expansion, and 4) factors driving lower sales and management costs to accelerate sales.

Daimo expects Jintian's sales to increase by about 35% and net profit by 32% in 2014, and raised the company's 2014/15 earnings per share forecast of 9% and 8% to maintain the “increase in holdings” rating. The target price was raised from 3.9 yuan to 4.5 yuan, reflecting the ideal prospects for distribution sales growth and expected profit margin expansion.

The bank raised Jintian's distribution sales growth forecast for this year and next two years from 28% and 25%, respectively, to 36% and 28%, respectively. The bank also raised its gross margin forecast for this year by 50 basis points to 29% and maintained its gross margin forecast of 29.7% for next year; sales and management expenses were lowered by 70 basis points and 150 basis points respectively; while the overall operating profit forecast was raised by 100 basis points and 20 basis points to 14.8% and 13.9%, respectively.

Daimo said that Jintian's current valuation is equivalent to 8 to 10 times the price-earnings ratio from 2014 to 15, with a discount of about 40% compared to peers, making the valuation attractive.