20150819-招商证券_香港_-Company_Report_13页_714kb

Financial Analysis Summary

Core Financial Overview

• Total Sales Growth Expectations:

  • Expected to grow at 22% / 19% / 18% YoY for FY15E, FY16E, and FY17E respectively.
  • These growth rates are lower than previous estimates by -6% / -10% / -12% due to deaccelerating industry growth.

• Direct Model Products:

  • Deanxit and Ursofalk: Expected to moderate growth to around 18% YoY in FY15E.
  • Stulln, Bioflor, and GanFuLe: Anticipated to continue faster growth, driving overall performance.
  • New Products (NuOdiKang, DanShenTong, Combizym, Hirudoid): Expected to contribute RMB200mn in revenue in FY15E.

• Agency Model Products:

  • ShaDuoLiKa: Recorded a -21% YoY decrease due to a change in agency agreement after the expiry of the contract with Chongqing Yaoyou.
  • This product will no longer be a focus due to low margin, starting from 2H15.

Financial Performance Breakdown

Margin Analysis

• Gross Margin: Expected to remain stable at around 55.5% for FY15E, 56.0% for FY16E, and 56.2% for FY17E.
• SG&A Expenses: Expected to rise in FY15E due to the shift in business strategy, but will gradually subside starting FY16E.
• Operating Margin: Projected to be 21.5% in FY15E, 23.2% in FY16E, and 24.1% in FY17E.
• Net Margin: Expected to be 27.8% in FY15E, 29.4% in FY16E, and 30.3% in FY17E.

Key Financial Trends

• Revenue Growth:

  • Total revenue growth is expected to decrease from 31% in 2014 to 22% in FY15E, 19% in FY16E, and 18% in FY17E.
  • The direct model is expected to drive the growth with a stable gross margin of ~60%.
  • The agency model has a lower gross margin (~50%) and is expected to experience declining growth due to low margin and strategic shifts.

• SG&A Expenses:

  • Expected to increase in FY15E due to the introduction of 7 new products, which will be launched in FY15E.
  • This increase will impact the bottom-line but is expected to fade out after the initial stage.

Valuation Analysis

DCF Valuation

• Target Price: HK$13.10, implying a +38% upside from the current price of HK$9.46.
• Key Assumptions:
  • Risk-free rate: 3.60%
  • Equity risk premium: 6.00%
  • Beta: 1.0
  • Cost of equity: 9.60%
  • WACC: 9.20%
  • Terminal growth rate: 3%

P/E and PEG Analysis

• P/E Ratio:
  • Target price implies a 21x P/E for FY16E.
  • Compared with peers: Pioneer Pharma (11x), NT Pharma (18x), Lee's Pharm (22x).
• PEG Ratio:
  • Target price corresponds to 0.9x PEG for FY16E.
  • International peers average 1.6x PEG, while domestic peers average 0.9x PEG.

Notes

• Operating Cash Flow: Expected to dip in FY15E due to increased inventory and receivable days, but is anticipated to return to normal starting FY16E.
• Dividend Payout Ratio: Expected to remain stable at ~40% for FY15E-17E.
• Balance Sheet: Healthy with stable cash flows and a consistent dividend policy.
• Profit Before Tax Margin: Expected to decrease from 38.4% in 2014 to 30.1% in FY15E, then to 31.9% in FY16E, and 32.8% in FY17E.

Conclusion

• CMS is expected to see a slowdown in revenue growth due to deaccelerating industry trends and strategic shifts.
• The direct model is expected to drive growth, while the agency model faces challenges due to low margins and contract changes.
• The company has a strong margin position and a healthy balance sheet, supporting its valuation premium.
• The target price of HK$13.10 is justified by its unique business model, product pipeline, and exclusive promotion rights.