20160620-招商证券_香港_-CMS_HK__Research_Highlights_13页_555kb

Biostime Summary

Core Content

Biostime (1112 HK), currently trading at HK$26.1, is rated NEUTRAL with a target price (TP) of HK$29.7. The report highlights several key factors influencing its performance and valuation:

• Earnings Visibility: Earnings visibility remains low, with 2H16E expected to provide clearer insights.
• Formula Milk Profitability: Formula milk profitability is anticipated to rebound in the short term but is not expected to be sustainable due to ongoing industry competition and continued investment costs.
• Profit Margin Forecast: The full-year profit margin for formula milk is expected to be 8.4% (up from the previous forecast of 7%).
• Health Product Policy: A new policy for health products is set to be implemented on July 1, which includes tightening online regulations. This may affect the company's operations and sales.
• Cross-Border E-commerce Policy: The cross-border e-commerce policy will be delayed by one year, but the long-term registration/filing system for health products remains a risk, potentially reducing Swisse sales by 10%.
• Financing and Interest Costs: Biostime issued a US$450 million term loan and a US$400 million senior note to refinance, leading to high interest costs in the next two years. The net gearing is expected to decrease from 203% in 2016E to 95% in 2018E.
• Valuation Adjustments: The company's revenue estimates for 2016-2018E have been trimmed by 6.6%, 7.5%, and 9.4%, respectively. However, 2016E earnings have been lifted by 2.8%. The TP is calculated using the SOTP valuation methodology, with a 14x P/E for formula milk and 20x P/E for Swisse, leading to a TP of HK$29.7.
• Current Valuation: The company is currently trading at 14.6x 2016E P/E and 12.9x 2017E P/E, which is below its historical average of 20.6x P/E.

Main Points and Key Information

• Formula Milk Performance:

  • 1Q16 revenue fell 14% YoY, lower than expected.
  • Profitability may still be declining due to investment costs.
  • Full-year profit margin for formula milk is forecasted at 8.4%.

• Swisse and Policy Risks:

  • The new health product policy will be implemented on July 1, affecting online and offline marketing.
  • The cross-border e-commerce policy delay may provide short-term stability, but long-term risks remain.
  • The policy is expected to reduce Swisse sales by 10%.

• Financing and Interest Costs:

  • The company raised capital through term loan and senior notes to address the financing gap.
  • Interest costs are forecasted at $330 million for 2016E, $410 million for 2017E, and $400 million for 2018E.
  • Net gearing will decrease significantly from 203% in 2016E to 95% in 2018E.

• Valuation:

  • Revenue estimates have been adjusted downward.
  • Earnings estimates have been slightly adjusted upward for 2016E.
  • TP is calculated using SOTP, resulting in a 17.9x 2016E P/E or 15.8x 2017E P/E.
  • The company is currently undervalued relative to its historical average.

Overseas Macro Review

• Brexit Referendum: The UK's EU referendum is a key event this week, with potential impacts on global markets.
  • A remain vote may reduce overseas risks and improve market sentiment.
  • A leave vote may increase uncertainty and negatively affect markets, with potential long-term impacts on the Eurozone.
  • The outcome is uncertain, and the market may face either a reprieve or a fresh bout of uncertainty.

A-Share Research Highlights

• Renminbi Outlook: The renminbi is expected to strengthen again by the end of 3Q16E due to:
  1. A potential increase in trade surplus.
  2. The possibility of being added to the SDR currency basket in September 2016.
  3. Expected increase in global capital inflow to China.

What to Watch

• Economic Data:

  • Japan: Exports and imports (YY), Trade Balance (Total Yen).
  • Germany: ZEW Economic Sentiment, Import Prices (MM), Ifo Business Climate.
  • US: API weekly crude stocks, Existing Home Sales, Durable Goods, U Mich Sentiment.
  • Eurozone: Consumer Confidence Flash.

• Company Events:

  • Multiple companies announced financial results or dividends for the year ending March 31, 2016.

Research Coverage List

Conclusion

Biostime faces short-term challenges in formula milk profitability and long-term policy risks, particularly in the health product sector. Despite the refinancing efforts, the company is expected to continue incurring high interest costs over the next two years. Its current valuation is below historical averages, but the SOTP methodology suggests a target price of HK$29.7, implying a 17.9x 2016E P/E. The outcome of the UK's EU referendum is a key macroeconomic event that could significantly impact the company and global markets.