Shipments of proprietary Chinese medicines are expected to decline slightly in the first half of 2016. The company held a large-scale promotion from May to June 2015, which caused many retail stores to actively hoard goods at that time. At present, the progress of terminal destocking in some retail stores is slightly slower than expected, so it is expected that the shipments of the company's proprietary Chinese medicine business may decline slightly in the first half of the year compared with the same period last year, but this is accidental. And the company has further strengthened the training of retail stores. It is believed that the shipment of proprietary Chinese medicine in half a year will be significantly better than in the first half of the year.
The promotion progress of the new type of broken wall pieces will take a little time. In November last year, the company signed a contract with the famous marketing company Trout&Partners to promote the new broken wall slices, which is currently being piloted in Zhongshan and Dongguan, where the head office is located. At present, sales in Zhongshan are growing very fast, and sales are expected to increase by more than 70% in the past few months compared with the same period last year. Zhongshan accounted for about 7% of the company's sales of new wall-breaking slices in 2015, so we think Zhongshan's success is a very good start. Dongguan's current sales growth is slightly slower than expected, and the company will carry out promotional activities in Shenzhen and other places in the second half of the year. We believe that the situation in the first half of the year reflects that promotion in other parts of Guangdong Province outside Zhongshan may be slightly more difficult than expected in the short term, and the company needs to make some strategic improvements, so we have slightly lowered the revenue forecast for the new broken wall slices, but the long-term prospects are promising.
Additional advertising investment affects profits in 2016, but the long-term effect is promising. Jiangsu Satellite TV began broadcasting the first large-scale documentary series of traditional Chinese medicine culture in China, "Materia Medica China" on May 20, 2016. The company believes that this is a good opportunity to promote and publicize. Therefore, in the first half of the year, more than 10 million additional investment was made to promote new broken wall slices on this program, which will affect profits in the first half of the year. Jiangsu Satellite TV has a very high audience rating in China, and being able to be on the first documentary series of traditional Chinese medicine culture in China also proves that the company's products are of high quality. The broadcast time of "Materia Medica China" is every Friday prime time, so we believe that the effect of advertising in the long run is worth watching.
Investment advice: we believe that the company's profits in 2016 and 2017 will be affected by advertising spending, but due to the company's high product absorption rate, security and stability, the long-term advertising effect will be gradually reflected, so we are optimistic about the company's long-term prospects. We estimate that the 2016E-2018E EPS is 0.07 pound 0.10 plus 0.16 yuan respectively. We have a "overweight" rating and set a target price of HK $2.45 at 0.6 times PEG.
Risk hints: I) the increase in marketing costs for the promotion of new prepared slices is greater than expected; ii) the advertising effect of new wall-broken prepared slices is worse than expected; iii) the expansion of retail network is slower than expected; iv) the promotion of product hospitals is slower than expected.