SMALL IN SIZE, BIG IN POTENTIAL
Concentrated Chinese medicine granule (CCMG): a new promisingmarket. CCMG contributed 89% of Pura’s 2014 sales (HK: 41%,the PRC: 48%). Derived from herbs, it dissolves instantly in water asa drink, unlike herbal Chinese medicines which require a longdecoction process. This enabled the CCMG market in the PRC togrow at 41% CAGR (2010-14), 6ppt faster than for herbalmedicines. And the CAGR should remain strong at 30% over 2014-19. The PRC’s CCMG market was only 4% of the herbal medicinemarket in 2014 (HK: 11%), suggesting ample room to grow.
Pura: a licensed CCMG maker in China with superior R&D. Inmainland China, there are only five licensed CCMG makers. As alatecomer, Pura’s market share there is only 3%. But it is the onlyone that complies with international standards accepted by over140 countries, which facilitates future overseas expansion. In HK, ithas 70% market share and is the sole supplier to the HK HospitalAuthority. This provides stable revenues to fuel growth in China.We expect Pura’s earnings to expand at 36% CAGR over 2014-17driven by rising demand for CCMG in China and co-operation withthe largest drug distributor Sinopharm (1099 HK) since 2014.
Potential to be acquired / invested by large drug makers. Webelieve Pura could be acquired / invested by drug makers interestedin China’s CCMG market but do not have a license (we identifiedsix such companies, where three have >Rmb1.8bn net cash).
Acquiring current players is the quickest way to tap into this marketfor them. Pura is the smallest player and at our TP or fair value(HK$7.20ps), it is valued at Rmb1.3bn, which is very affordable tothem. This could be a strong potential share price catalyst for Pura.
Valuation:
Our TP of HK$7.20 is based on 25x 12-month forward price-tonormalisedearnings ratio (adding back IPO expense in 2015 whichis a one-off item), representing a 30% discount to our target PE ofCCMG industry leader China Traditional Chinese Medicine (CTCM,570 HK). The discount reflects Pura’s smaller CCMG business scale(2014 market share: 3% vs 53% for CTCM).
Key Risks to Our View:
The PRC government may allow more players to enter the CCMGindustry, although the timing is still uncertain
SMALL IN SIZE, BIG IN POTENTIAL
Concentrated Chinese medicine granule (CCMG): a new promisingmarket. CCMG contributed 89% of Pura’s 2014 sales (HK: 41%,the PRC: 48%). Derived from herbs, it dissolves instantly in water asa drink, unlike herbal Chinese medicines which require a longdecoction process. This enabled the CCMG market in the PRC togrow at 41% CAGR (2010-14), 6ppt faster than for herbalmedicines. And the CAGR should remain strong at 30% over 2014-19. The PRC’s CCMG market was only 4% of the herbal medicinemarket in 2014 (HK: 11%), suggesting ample room to grow.
Pura: a licensed CCMG maker in China with superior R&D. Inmainland China, there are only five licensed CCMG makers. As alatecomer, Pura’s market share there is only 3%. But it is the onlyone that complies with international standards accepted by over140 countries, which facilitates future overseas expansion. In HK, ithas 70% market share and is the sole supplier to the HK HospitalAuthority. This provides stable revenues to fuel growth in China.We expect Pura’s earnings to expand at 36% CAGR over 2014-17driven by rising demand for CCMG in China and co-operation withthe largest drug distributor Sinopharm (1099 HK) since 2014.
Potential to be acquired / invested by large drug makers. Webelieve Pura could be acquired / invested by drug makers interestedin China’s CCMG market but do not have a license (we identifiedsix such companies, where three have >Rmb1.8bn net cash).
Acquiring current players is the quickest way to tap into this marketfor them. Pura is the smallest player and at our TP or fair value(HK$7.20ps), it is valued at Rmb1.3bn, which is very affordable tothem. This could be a strong potential share price catalyst for Pura.
Valuation:
Our TP of HK$7.20 is based on 25x 12-month forward price-tonormalisedearnings ratio (adding back IPO expense in 2015 whichis a one-off item), representing a 30% discount to our target PE ofCCMG industry leader China Traditional Chinese Medicine (CTCM,570 HK). The discount reflects Pura’s smaller CCMG business scale(2014 market share: 3% vs 53% for CTCM).
Key Risks to Our View:
The PRC government may allow more players to enter the CCMGindustry, although the timing is still uncertain
