20180508-招商证券_香港_-绿叶制药-02186.HK-Acquired_AZ_s_anti-psychotic_assets_9页_1mb

Luye Pharma (2186 HK) Summary

Core Content

Luye Pharma (2186 HK) has acquired AstraZeneca's Seroquel/Seroquel XR in 51 markets, including China, for US$546 million. The acquisition is aimed at enhancing Luye's CNS product line and diversifying its sales base. The company's strategic rationale includes improving sales capabilities, market access, and geographic diversification, with approximately 2/3 of the acquired revenue from markets outside China.

Main Strategic Rationales

• Enhancing CNS Product Line: The acquisition strengthens Luye's position in the central nervous system (CNS) drugs segment.
• Geographic Diversification: A significant portion of the revenue comes from markets outside of China, reducing reliance on a single region.
• Market Access and Sales Capabilities: The acquired assets provide access to established markets and enhance sales infrastructure.

Key Financial Projections

• Revenue Growth: Expected to grow by 22% in 2018E and 13% in 2019E.
• Adj. Net Profit Growth: Projected to increase by 23% in 2018E and 10% in 2019E.
• EPS Accretion: Estimated to rise by 16% in 2018E and 22% in 2019E.
• Valuation Multiples:
  • EV/Sales: 3.7 to 3.8
  • EV/EBIT: 4.9 to 6.9
  • EV/FCF: 5.8 to 8.2

Valuation and Target Price

• Target Price (TP): Revised to HK$9.33, reflecting the integration of acquired assets and removal of the M&A premium due to reduced optionality.
• NPV of Acquired Assets: HK$1.3 per share.
• Gearing Increase: Net gearing is expected to rise to approximately 23% by December 2019 from -13% previously.

Financial Highlights

Metric	2015	2016	2017	2018E	2019E
Revenue (RMB mn)	2,563	2,918	3,815	4,641	5,234
Adj. Net Profit (RMB)	754	932	1,068	1,316	1,452
Adj. EPS (RMB)	0.28	0.33	0.39	0.50	0.55
P/E (x)	34.6	29.3	24.7	19.1	17.3
P/B (x)	4.6	4.3	3.9	3.3	2.9

Analyst Rating

• Company Rating: Downgraded to NEUTRAL.
• Industry Rating: OVERWEIGHT.

Shareholding Structure

• Luye Pharmaceutical Investment: 46.3%
• CITIC PE: 6.0%
• Free Float: 47.7%

Key Data

• 52-week Range (HK$): 3.95–9.75
• Market Cap (HK$ mn): 29,573
• Avg. Daily Volume (mn): 18.27
• BVPS (HK$): 1.94

SOTP-Based Valuation

• Core Portfolio Drugs (NPV, WACC=8.6%): RMB 18,478 mn
• Acquired Assets: RMB 3,434 mn
• Capital Commitment: RMB -1,802 mn
• Minority Interest: RMB -103 mn
• Total Equity Value: RMB 25,272.19 mn
• Valuation per Share (HKD): HK$9.33

Earnings Revision

Item	Original	NEW	Change (%)
Consolidated Revenue	4,109	4,641	13%
Gross Profit	3,197	3,666	15%
Adj. Net Profit	1,137	1,316	16%
Adj. EPS (RMB)	0.35	0.40	16%
Adj. EPS (HKD)	0.43	0.50	16%

Main Assumptions

• Seroquel sales in China will decline by 5–10% annually due to generic competition.
• Seroquel XR sales in China are expected to grow by 20–25% in 2018–19E and slow to 10–15% in 2020–21E.
• Sales in Asia ex China will grow by 5% annually.
• Sales in rest of the world will fall by 10% annually.
• FCF is expected to equal NOPAT, assuming working capital and CAPEX offset D&A.
• Terminal growth rate is -3% due to off-patent nature of assets.
• Effective tax rate is 16.5%.

Risk Factors

• Generic Competition: A major risk in both China and international markets.
• Transition Challenges: Managing the transfer of marketing and extended release technology from AZ.
• M&A Premium: The share price has already front-run the acquisition, reducing the potential M&A premium.

Conclusion

While the acquisition of Seroquel/Seroquel XR is expected to deliver significant near-term EPS accretion, the company's overall rating has been downgraded to NEUTRAL due to concerns over operational challenges and the reduced optionality of its balance sheet. The revised target price reflects the fair valuation of the acquired assets without the M&A premium.