Chuangmei Pharmaceutical Co., Ltd. plans to list on the Shenzhen Stock Exchange and issue no more than 20 million A shares, with a view to raising about 252 million yuan for the construction of Guangzhou Pharmaceutical sorting and Distribution Center, the upgrading of information systems and the expansion of pharmaceutical wholesale business.

The application for A share offering was accepted by the China Securities Regulatory Commission on December 15, 2017. At present, the release has not yet been completed.

The A-share issue is conducive to thickening performance in the long run, although there is a dilution of up to 15.63% on short-term earnings per share. The main considerations are 1) the Guangzhou sorting and distribution center is expected to bring an average annual income of 4 billion yuan when in full use; 2) A-share issuance will reduce the company's current financial burden and risks and support the company's further expansion of business; and 3) the expansion of operation scale will increase the company's gross profit margin. In addition, the relative valuation of the company's H shares is expected to be driven by the completion of the A share offering, considering that A shares enjoy a higher valuation than H shares, as the company's China-listed peers are trading at a price-to-earnings ratio of 22.9 times / 19.5 times for fiscal year 2017 / fiscal year 2018, while their Hong Kong-listed peers are trading at a price-to-earnings ratio of 16.2 times / 14.3 times for fiscal year 2017 / 2018.

After reviewing the company's development plan, the net profit per share for fiscal year 2017-2019 was fine-tuned to RMB 0.529, which did not take into account the outstanding A-share issue. We are optimistic about earnings for fiscal year 2018 and beyond, so we maintain the investment rating of "Collection" and raise the target price to HK $10.00 to reflect the market's positive reaction to the A-share listing, which corresponds to the price-to-earnings ratio of 16.3x / 13.8x for FY2017 / FY2018.