20160323-招商证券_香港_-中国中药-00570.HK-FY15_missed_on_sluggish_TCM_segment_13页_1mb

Financial Analysis Summary

Core Content Overview

This document provides a detailed financial analysis of CTCM and Tianjiang Pharma, with a focus on revenue trends, gross margin stability, and consolidated financial performance. It also includes a valuation analysis based on DCF and P/E methods, comparing the company with industry peers.

Key Financial Insights

CTCM

• Revenue Growth: FY16E top-line growth is expected to be weaker than prior expectations. The core business is projected to grow at a single-digit rate (around 7%) for FY16E-17E, reflecting a sector-wide slowdown.
• Gross Margin: The gross margin has been trending downward due to changes in retail pricing and increased raw material costs. However, the decline is expected to be temporary, as synergy effects from existing products should offset raw material price fluctuations and stabilize margins.

Tianjiang Pharma

• Bottom-Line Growth: Tianjiang is expected to deliver 18%, 13%, and 14% growth in FY15E-FY17E, respectively, driven by its strong position in the concentrated TCM granule market and increased demand for its principal products.
• Gross Margin Stability: Gross margin is expected to remain largely stable, supported by declining raw material costs, hedging measures, and potential platform synergies with CTCM.
• Conservative Estimates: The growth projections are conservative compared to the management guidance of 20% and 15%-20% for FY15E and FY16E, respectively.

Financial Performance (Tianjiang)

Income Statement Highlights

• Total Revenue: Grew steadily from 2012A to 2017E, with a slowing growth rate in recent years.
• Gross Profit: Increased from 1,104,472 in 2012A to 2,786,784 in 2017E, with a margin that decreased slightly from 58% to 52%.
• Net Profit: Rose from 516,907 in 2012A to 1,001,110 in 2017E, with a margin that decreased from 27.3% to 18.7%.
• Operating Margin: Remained stable around 19.6% to 21.3% over the period.

Consolidated Financials (CTCM + Tianjiang)

Revenue Breakdown

• Total Sales: Showed a significant growth trajectory from 2013 to 2015, with a slowdown in 2016E and 2017E.
• Growth Trends: FY16E revenue growth is expected to be 102%, while FY17E and FY18E growth rates are projected at 7% and 6%, respectively.
• Product Performance: Products like Xianling Gubao, Jingshu Granule, and others have shown varying growth rates, with some experiencing declines.

Profit and Margin Analysis

• Gross Margin: Is expected to decline from 59.1% in 2015A to 54.9% in 2016E, and further to 54.7% in 2017E.
• Operating Margin: Remains relatively stable, ranging from 18.8% to 21.6%.
• Net Margin: Slightly decreased from 16.8% in 2015A to 16.1% in 2016E, and is projected to remain around 16.4% in 2017E.

Valuation Analysis

DCF Valuation

• Target Price: A 12-month target price of HK$5.8 is suggested based on DCF analysis.
• Key Assumptions:
  • Risk-free rate: 3.0%
  • Equity risk premium: 9.00%
  • Beta: 0.87
  • Cost of equity (COE): 10.8%
  • Weighted Average Cost of Capital (WACC): 9.8%
  • Terminal growth rate: 2%

Sensitivity Analysis

• Target Price Range:
  • High end: HK$6.6 (21x 2016E P/E)
  • Midpoint: HK$5.8 (18x 2016E P/E)
  • Low end: HK$5.3 (17x 2016E P/E)
• Parameters Considered: WACC (9.3%, 10.3%, 11.3%) and terminal growth rate (1%, 2%, 3%).

P/E Analysis

• Target Price (HK$5.8): Corresponds to a P/E ratio of 18x for FY16E.
• Peer Comparison:
  • A-share peers: Yunnan Baiyao (000538 CH) is at 19x FY16E P/E, while others are at 22%-31x.
  • Hong Kong peers: Baidu (874 HK) and Livzon Pharma (1513 HK) are at 13x-15x FY16E P/E.
• Justification for Premium: The company is considered a bellwether in the TCM industry, benefits from the Tianjiang acquisition, and has access to a SOE platform for long-term growth.

Summary of Key Financial Ratios (Tianjiang)

Summary of Key Financial Ratios (Consolidated)

Conclusion

The financial analysis indicates that CTCM and Tianjiang Pharma are facing a slowdown in the healthcare and TCM sectors, with CTCM expected to stabilize its gross margin, while Tianjiang's growth is driven by market positioning and demand. The consolidated financials show a decline in gross margin but a stable operating margin. The DCF-based valuation suggests a target price of HK$5.8, which is considered attractive compared to the current P/E ratio of 12.8x, and is justified by its industry leadership, strategic acquisitions, and SOE platform access.