Event

ST* Baihua bought coal assets into the CRO business: listed companies bought out assets including a 66 per cent stake in Hongji Coking Co., Ltd., a 51 per cent stake in Yuxin Coal, a 100 per cent stake in natural products and claims on 101 coal mines; and Warwick Pharmaceuticals. Delivery of assets to transfer ownership.

Comment

1. Invested assets Huawei Pharmaceutical is the leading CRO enterprise in China: Warwick Pharmaceutical previously focused on preclinical CRO business, the current layout of clinical CRO plate and CMO plate, the expansion of the industrial chain brings the diversification of income structure. With the improvement of the layout of the industrial chain, the company will have the strength to provide customers with "one-stop service", which is in line with the development of the international leading CRO company.

two。 Warwick Pharmaceuticals benefits from the increased industry concentration brought about by the verification policy and the incremental market opportunities brought about by generic drug consistency evaluation:

(1) since the storm of self-examination and verification of clinical trial data that began last year, the national GLP (Drug Laboratory Management Standard) and GCP (Drug Clinical trial Management Standard) have become increasingly stringent. Verification is bad for the CRO industry in the short term, but it is good for the leading CRO company in the long run.

(2) generic drug conformance evaluation brings incremental market to CRO industry. According to our estimation, the market size of 289 base drugs that need to complete conformance evaluation before 2018 is 15.8 billion, which is expected to be allocated to CRO industry 6.3 billion; the market increment brought by the conformance evaluation of all drugs is more than 75 billion, and the CRO industry is expected to get 30 billion incremental market.

(3) the CRO industry is a fine molecule industry in the field of medical services that we are optimistic about in the future. The industry point of view can refer to our in-depth report on the CRO industry released in March, "the rise of CRO Industry Convergence, Sunrise Industry ushering in New opportunities". Huawei Pharmaceutical, as an excellent CRO leading enterprise in China, we continue to be optimistic about the future development of the company.

3. Strategic investors will help the company develop on the platform in the future: on January 2, 2016, the State-owned Company of the sixth Division signed a Strategic Cooperation Agreement with Liyi Investment and Ruidong Capital.

(1) in the agreement, Liyi Investment undertakes to promote the high-quality pharmaceutical projects invested by its funds in a market-oriented manner, giving priority to Baihua Village, and continue to help Baihua Village implement outsourcing services in pharmaceutical research and development and mergers and acquisitions in the biopharmaceutical industry (including genetics, cell therapy, targeted drugs, etc.).

(2) Ruidong Capital promises to seek high-quality biomedical projects at home and abroad in a market-oriented way.

Flower Village.

For the specific situation of Huawei Pharmaceutical, please refer to our company's in-depth report "Major assets restructuring meeting, layout CRO platform Development" released in June.

Profit forecast

We estimate that the net profit from 2016 to 2018 belonging to the parent company of Huawei Pharmaceutical will be 110 million, 130 million and 153 million respectively. If calculated according to the profit of the new assets, the corresponding listed companies EPS 0.24,0.29,0.34 yuan.

Risk hint

Related risks of profit forecast; transaction approval risk; new classification risk of chemical registration; progress of asset integration; progress of asset injection.