Target price and valuation: we maintain the target price of 2013-15 EPS forecast RMB 0.20, 0.26, 0.32 (year-on-year growth of 39.3%, 29.1%, 24.1%, respectively) and HK $4.88, which is 19% higher than the current share price. Although the share price has risen 61% since our recommendation, the current stock price is only 12.7 times 14-year price-to-earnings ratio, PEG is only 0.5 times, the valuation is very attractive, we believe that the stock is seriously undervalued, repeat the purchase.
Key assumption: the sales growth of Ann series in 1.2013-15 is 15%, 20%, 20%, 20%, 2. 2013-15, respectively, 65%, 40%, 30%, respectively.
We are different from the market
Anti-bribery investigation has little impact, strong growth continues, management said that the recent anti-pharmaceutical bribery investigation has no significant impact on the company. Continued strong growth in the third quarter. We estimate that profit growth in the first-third quarter is expected to reach 3540%, significantly higher than the industry average.
An series and Lei Yi de will continue to drive strong growth strong profit growth in the first half of the year is mainly driven by strong growth (26.9%) in the specialist pharmaceutical business with high gross margins (accounting for 42% of total sales and 95% of total profits). An series of antihypertensive drugs and Lei Yi de anti-hepatitis B drugs are two main growth points, accounting for 88% of the business sales and > 90% of the profits. Management said that the faster growth of the Ann series (1H13VR 14.3%) led to better growth of the business in the third quarter than in the first half. Lei Yi de maintained growth of more than 50% in the third quarter. We estimate that the sales of this business will increase by ~ 29% in the first-third quarter. We believe that the Ann series will continue to be one of the main growth points. the reasons are: 1) the fast-growing antihypertensive drug market brought about by rising urbanization and an aging population; 2) an excellent product mix to meet the different needs of patients; 3) the compulsory implementation of base drugs in primary care institutions will lead to the sales volume of Annezhen (accounting for 90% of sales in the 2012 edition of the base drug catalogue). 4) the promotion of community hospitals and retail drugstores. We believe that Lei Yi de will also continue to be one of the main growth points. the reasons are 1) the huge market for hepatitis B drugs brought by the huge population of hepatitis B, 2) the replacement of the older generation of anti-hepatitis B drugs, 3) the replacement of high-priced original drugs, and 4) winning the bid in more provinces.
The antibiotic intermediates and API business is resuming management said the business recorded a small operating loss in the third quarter, but improved in the fourth quarter. We estimate that operating profits are expected to be made in the fourth quarter and operating losses are expected to be avoided for the whole year, which is better than 12 years of operating losses. The business will benefit from a weak recovery in the antibiotic industry in the future, but its profit contribution is almost negligible compared with the specialist drug business.
Several major drug development companies focus on cardio-cerebrovascular, blood system, anti-infection, diabetes and other major diseases and are committed to launching first or second imitation drugs to gain brand and market share. The company expects to launch a first generic drug to treat Alzheimer's disease and a lipid-lowering generic drug in 2014, taking into account the growing Alzheimer's disease associated with an aging population, the rising incidence of cardiovascular and cerebrovascular diseases, and the huge market potential (90 billion and 60 billion of the Alzheimer's and lipid-lowering markets and more than 25 per cent historical growth), the company is optimistic about these two drugs. The company also expects to introduce several oral antibiotic varieties in 2014 to complement its existing portfolio. Oral antibiotics currently account for a small proportion, but are growing rapidly (1H13: 52%). The company believes that hospital antibiotic restriction will lead to more powder injection replaced by oral antibiotics, and more oral antibiotics will be promoted in the future. We estimate that at least 12 new drugs will be on the market in the next three years.
Maintain the healthy cash flow of the company with high dividend payout rate. Management says the dividend yield of 40% will continue in the future. The ratio is higher than the industry average, indicating that the company is committed to improving returns to shareholders.
Capacity bottlenecks will soon disappear. The new production plant is undergoing GMP certification and is expected to start production in early 2014. The design capacity of the new plant is 3 ~ 4 times of the current capacity, which will greatly alleviate the capacity pressure. Capacity expansion will lay a solid foundation for strong growth in the future.
Catalyst: 1. Ann Neizhen grew faster than expected; 2. Lei Yi de grew faster than expected; 3. New drugs are constantly on the market.
Risk: 1. The price pressure of the new round of base drug bidding on Annezhen; 2. The new drug came to market later than expected.