The company announced its 2015 results at noon yesterday and held a meeting of analysts after the close. The company's operating income in 2015 increased by 25.7% year-on-year to 985 million yuan, roughly in line with market expectations. The revenue growth during the period was mainly due to the strong growth of the anti-hepatitis drug Leiyide and the recovery of the intermediate and API business. Gross profit margin fell 0.9 percentage points to 57.8 per cent, mainly due to significant growth in revenue from intermediates and APIs with lower profit margins. Due to the company's strict control of sales, general and administrative expenses, as well as the company's increased capacity utilization, the company's net profit increased by 47.3% year-on-year to 302 million yuan, in line with market expectations of 297 million yuan. Management expects the company's net profit to grow by 20% in 2016 compared with the same period last year. Leidi's growth slowed in the second half of 2015. In 2015, Lei Yide contributed income of 266.8 million yuan (up 50.4% from a year earlier). Lei Yi's revenue growth slowed sharply to 35.5% in the second half of 2015 from 69.8% in the first half. Management explained that this was mainly due to a change in marketing strategy. Management expects Lei Yi to achieve year-on-year growth of more than 20% in 2016. We believe that compared with the strong sales performance in previous years, the guidelines this time are relatively conservative, which may be due to: (1) increasing competition in the market; (2) price pressure caused by drug tendering; and (3) policy uncertainty.
The "an" series continues to grow steadily. The antihypertensive "an" series contributed 341 million yuan (up 12.4% from a year earlier), but its year-on-year growth in the second half of 2015 was 1.2%, down sharply from 23.3% in the first half of 2015. Management explained that the sharp slowdown in growth was due to the company's destocking to adjust its marketing strategy and average selling price. Management pointed out that as a result of these adjustments, the "an" series recorded explosive growth in January and February 2016.
The intermediates and API business continued to record losses. Revenue from the intermediates and API business increased to 239.6 million yuan in 2015, mainly due to the upgrading of a GMP certification at the end of 2014 and the resumption of production in 2015, where the business continued to record a loss of 37.9 million yuan in 2015, compared with 30.8 million yuan in 2014, mainly due to weak market demand for cephalosporins. Management mentioned that the division's gross margin is-2% to 3%, which means that the average selling price is under a lot of pressure. Although some of the exported intermediates and APIs can set higher average prices, the proportion of exports is very small, so almost the entire business is facing a difficult domestic antibiotic market. Management expects this market segment to break even in the second half of 2016, but we believe that demand for antibiotic products will continue to be weak, making it difficult to achieve the break-even target.
Two new products are expected to be launched in 2016, one is AstraZeneca PLC's digestive tract drug, esomeprazole sodium, and the other is cephalosporin. We believe that these two new products will start to contribute revenue in 2018. Management also mentioned that the company has been looking for potential new drug acquisition targets.
Previously, the company spent about 10 per cent of its net profit on research and development. However, due to the bioequivalence guidance set by the State Food and Drug Administration and the continued development of new drugs, management expects R & D costs to continue to increase.
Valuation: the company has a 17-year price-to-earnings ratio of 10.5 to 8.6 times earnings in 2016, lower than that of its peers. We believe that, given the company's growth potential, the current valuation of shares is not an expensive catalyst: the launch of new products; the faster-than-expected growth of the Leidi and "an" series; and the recovery of the intermediates and API business.
Risk: Lei Yi's average selling price is reduced.