20151211-中国银河国际证券-威高股份-01066.HK-INITIATE_COVERAGE_Turning_point_operating_leverage_improvement_to_emerge_21页_1mb

Shandong Weigao Group [1066.HK] Summary

Core Content

Shandong Weigao Group is a leading medical consumable manufacturer in China, with a diversified product portfolio that includes consumables, orthopaedic implants, and blood purification products. The company has undergone significant restructuring and investment in recent years, which is expected to lead to operating leverage improvements and better profitability in the coming years.

Main Growth Drivers

• Orthopaedic and Blood Purification Products: These are identified as the main growth engines for the company. The orthopaedic segment, in particular, is expected to benefit from the separate listing of its orthopaedic business, which should improve sentiment and unlock value.
• High-margin Products: The company's focus on high-margin products is expected to drive an increase in overall gross margin, from 58.8% in 2014 to 60.3% in 2017E.
• Market Expansion: The orthopaedic business has a complete product range covering both high-end and low-end segments, with brand differentiation helping capture growth in both areas.

Key Financials

Metric	2013A	2014A	2015E	2016E	2017E
Revenue (RMB m)	4,613	5,278	6,052	6,921	7,950
Core Net Profit (RMB m)	867	985	1,174	1,393	1,652
Core Net Margin (%)	18.8	18.7	19.4	20.1	20.8
Core EPS (RMB)	0.194	0.220	0.262	0.311	0.369
Operating Margin (%)	23.1	21.3	21.5	22.5	23.3
EBITDA Margin (%)	27.2	25.9	25.8	26.4	27.1

Investment Highlights

• Operating Leverage Improvement: The company has reversed the down trend in operating margin, with a forecast of 22.5% in 2016E and 23.3% in 2017E.
• IPO of Orthopaedic Business: The orthopaedic business is expected to be listed on the Hong Kong Stock Exchange in Q1 2016, which should act as a short-term catalyst for the company's share price.
• Valuation: The target price is set at HK$6.78, implying a 2015E/16E PER of 21.4x/18x. This is considered attractive given the company's leading position and operating leverage improvement.
• Share Price Performance: The share price has underperformed in 2H15 due to the delay in the orthopaedic IPO, despite satisfactory interim results.

Key Ratios

Ratio	2013A	2014A	2015E	2016E	2017E
Sales Growth (% YoY)	25.1	14.4	14.7	14.4	14.9
Operating Profit Growth (% YoY)	24.6	5.6	15.9	19.6	19.0
EBITDA Growth (% YoY)	27.5	9.3	13.9	17.4	17.7
Core Net Profit Margin (%)	18.8	18.7	19.4	20.1	20.8
ROE (%)	9.6	10.0	11.0	11.9	12.8
Current Ratio (X)	3.0	3.4	3.6	3.7	3.9
Quick Ratio (X)	1.5	1.5	1.7	1.7	1.9
Total Debt to Equity Ratio (%)	0.0	0.0	0.1	0.1	0.1

Investment Thesis

• Operating Leverage Improvement: The company has improved its operating efficiency, with SG&A expenses ratio dropping to 37% in 1H15. This is expected to lead to improved operating margins and core EPS growth.
• Orthopaedic Business Expansion: The orthopaedic segment is expected to grow faster than the rest of the business. The IPO is expected to be completed in Q1 2016 and will unlock value for the company.
• Blood Purification Business: The blood purification segment has strong growth potential due to the increasing prevalence of chronic kidney disease in China. Weigao has a full range of dialysis consumables and is well-positioned to benefit from this trend.
• Consumables Segment: The consumables segment is expected to grow at a slower rate due to increased market competition and government cost control measures.

Market Outlook

• Orthopaedic Market: The orthopaedic market in China is expected to grow at a CAGR of 17.6% from 2015 to 2019E. Trauma and joint sub-segments are particularly promising, with CAGRs of 18.3% and 24.2% respectively.
• Blood Purification Market: The dialysis products market is projected to be over RMB12bn in China, with high-end products (dialysis machines and dialyzers) dominated by MNCs. Weigao has a strong position in the low-end segment and is working on expanding into the high-end market.
• Government Policy: The government's cost control measures are expected to limit the growth of high-end consumables, but Weigao's strong brand image and distribution network should help it maintain its market position.

Conclusion

Shandong Weigao Group is expected to benefit from the growth of its orthopaedic and blood purification segments, driven by the company's restructuring efforts and the planned IPO of its orthopaedic business. The company's strong operating performance and brand reputation position it well for future growth, and the target price of HK$6.78 suggests a positive outlook.