20161118-招商证券_香港_-China_Healthcare_Sector__2017_Outlook_–_Revitalizing_Year_Ahead_23页_1mb_1mb

China Healthcare Sector 2017 Outlook Summary

Core Content

The 2017 outlook for the China healthcare sector suggests a revitalization following a challenging 2016. Key factors driving the sector's performance in 2017 include the conclusion of provincial tenders, the initial impact of the drug validation campaign being reflected in financials, and the ongoing consolidation in the industry. The report highlights that leading companies with strong R&D capabilities and potential M&A opportunities are expected to outperform.

Main Points and Key Information

Market Performance and Valuation

• Sector Valuation: HK-listed healthcare names are currently trading at 16x FY17E P/E and 0.9x PEG, which is considered attractive.
• Valuation Range: The reasonable valuation range for the sector is 17x–22x FY17E P/E.
• Growth Expectations: The sector is expected to see a growth rate revival from single-digit to around 15–20% top-line and bottom-line growth in FY17E, compared to 15% bottom-line growth in FY16E.
• Comparative Valuation: HK-listed healthcare companies are among the lowest valuations compared to A-share and regional counterparts such as Japan and Korea.

Industry Overview

• Pharmaceutical Manufacturing:

  • The sector has a favorable growth outlook due to demographics and government support.
  • Chemical drugs account for 56% of the market, followed by TCM (32%) and biopharmaceuticals (12%).
  • The market is highly fragmented, with top 5 and top 20 manufacturers accounting for 15% and 28% of the market in 2015.
  • Ongoing healthcare reforms and the two-invoice system are expected to drive consolidation, favoring large manufacturers with strong R&D and quality.

• Pharmaceutical Distribution:

  • The distribution industry is fragmented and inefficient, with around 13,500 distributors in 2015.
  • The top 3 distributors account for only 35% of the market share, compared to 90% in the U.S.
  • Consolidation is an ongoing trend, driven by government policies, regulatory requirements, and the growth of pharmacy chains and e-commerce models.
  • Large, well-established distributors like Sinopharm (1099 HK) and Shanghai Pharma (2607 HK) are expected to outperform.

• Hospital Market:

  • Hospitals are categorized into three tiers based on bed counts and medical capabilities.
  • Class III hospitals are the top tier with minimal bed requirements of 500.
  • Public hospitals dominate the market, but private hospitals are expected to grow faster in both new openings and revenues.
  • Specialty hospitals, especially in gynecology, pediatrics, and ophthalmology, are experiencing high growth due to favorable policies and increasing patient affordability.

Top Picks for 2017

1. China Medical System (867 HK) - BUY, Target Price: HK$14.0

• Business Model: Previously categorized as a Contract Sales Organization (CSO), CMS is now seen as a pharmaceutical manufacturer due to recent licensing and asset purchase agreements.
• Growth Drivers: Strong sales momentum for Deanxit and Plendil, with Plendil showing great potential as a future growth driver.
• Financials:
  • Revenue and net profit are expected to grow significantly in FY17E and FY18E.
  • EPS is projected to increase from RMB0.65 to RMB0.77.
  • P/E ratio is expected to decline from 16.7x to 14.1x, while PEG remains at 0.9x.
• Risks: Price erosion and uncertainties in the provincial tendering timetable.

2. China Biologic Products (CBPO US) - BUY, Target Price: US$149.0

• Growth Drivers: Steady organic growth, control over upstream, new product launches, and the accretive Guizhou Taibang deal.
• Pipeline: Fibrinogen received provincial FDA approval and is expected to launch in 2H17E. Factor IX and Antithrombin III are in clinical trials.
• Financials:
  • Revenue and net profit are projected to grow from US$383mn to US$456mn.
  • EPS is expected to increase from US$5.17 to US$6.38.
  • P/E ratio is projected to decline from 22.8x to 18.5x, while PEG is at 1.0x.
• Risks: Higher COGS and RMB devaluation.

3. HEC Pharm (1558 HK) - BUY, Target Price: HK$20.0

• Key Product: Kewei, the only authorized manufacturer and seller of oseltamivir phosphate API, granules, and capsules in China.
• Growth Drivers: Continued growth momentum for Kewei, supported by expanded sales teams and limited competition.
• R&D: Collaboration with TaiGen Bio to develop new anti-Hepatitis C drugs.
• Financials:
  • Revenue and net profit are expected to grow significantly in FY17E and FY18E.
  • EPS is projected to increase from HK$0.65 to HK$0.77.
  • P/E ratio is expected to decline from 16.7x to 14.1x, while PEG remains at 0.9x.
• Risks: Limited visibility on future growth and regulatory challenges.

Conclusion

The China healthcare sector is poised for a revitalization in 2017, driven by the conclusion of provincial tenders, the impact of the drug validation campaign, and ongoing industry consolidation. Leading manufacturers and distributors with strong R&D, quality, and operational efficiencies are expected to outperform, with CMS, CBPO, and HEC Pharm being the top picks for the year. The sector is undervalued compared to regional counterparts, making it an attractive investment opportunity.