20171204-广发证券_香港_-联邦制药-03933.HK-Insulin_pipeline_gaining_visibility__maintain_Buy_and_raise_TP_to_HK_7.90_5页_526kb

The United Laboratories (3933 HK) Equity Research Summary

Core Information

• Company: The United Laboratories (3933 HK)
• Analyst: Natalie Chiu
• SFC CE No.: AVH029
• Contact: nataliechiu@gfgroup.com.hk | +852 3760 2030
• Brokerage: GF Securities (Hong Kong) Brokerage Limited
• Date: Dec 4, 2017
• Stock Performance: Image from Bloomberg
• Target Price: HK$7.90 (raised from HK$5.30)
• Rating: Buy (maintained)

Key Data

Main Points

Insulin Pipeline Gaining Visibility

• The United Laboratories has recently received manufacturing approval for Insulin Aspart from the Guangdong FDA.
• The production approval is expected within 1-1.5 years.
• Insulin Determinir was among the first local companies to secure clinical trial approval.
• The company is well positioned to capitalize on the third-generation insulin market with a strong pipeline (1 GLP-1 and 3 insulin analogs).
• The recombinant insulin market in China was valued at Rmb4.8bn in 2016, with an expected Rmb7-8bn market for insulin analogs over the next five years.
• The company assumes a 2% market share by 2020, rising to 10% by 2025.

API Price Trends and EBIT Margins

• The market price of 6-APA rose to above Rmb230/kg in November, up 60% from 1H17.
• 2H17 is expected to see >20% YoY growth in ASP, while 1H17 saw 13% YoY growth.
• Despite rising input costs, EBIT margins are expected to improve due to the higher ASP.
• Ongoing pollution control in 4Q17 is expected to maintain ASP at around Rmb180/kg.

Re-rating Justified

• The company's pipeline visibility is expected to drive stronger growth momentum starting from FY18.
• API upcycle and expanding market coverage for Insulin Glargine are key growth drivers.
• The target price of HK$7.90 is based on FY18 EPS, with a 26.4% CAGR for diluted EPS over 2017-19 and a 0.9x PEG.

Key Risks

• Price volatility in the API segment.
• Slowdown in the third-generation insulin market.

Financial Overview

Revenue and Profit Projections (HK$ m)

Revenue and Profit Growth Rates

Margin Trends

ROE and P/E

Market Position

Figure 1: Strong Development Pipelines at Key Insulin Players

Figure 5: TUL's Revenue Mix

• Insulin and API businesses are key contributors to revenue.
• Recombinant insulin and finished drugs are expected to drive future growth.

Figure 6: Margin Trends

• Gross margin is expected to remain stable, while operating and net margins improve.
• Effective tax rate is expected to decrease from 53.1% in FY15 to 25.0% in FY19.

Peer Comparison (Figure 8)

Conclusion

• The company is well-positioned to benefit from the growing third-generation insulin market in China.
• Strong pipeline visibility and improving margins support the re-rating and target price increase.
• The Buy rating is maintained due to outperformance potential relative to the Hang Seng Index.
• Key risks include API price volatility and market growth slowdown.

Analyst Certification

• The views expressed reflect the personal views of the analyst.
• No direct or indirect remuneration is linked to specific recommendations or views in the report.

Disclosure of Interests

• GF Securities (Hong Kong) and its affiliated companies do not hold shares in the mentioned securities.
• No investment banking relationships with the companies in the past 12 months.
• Analysts and associates do not serve as officers of the mentioned companies and have no financial interests in the securities.

Disclaimer

• This report is for informational purposes only and not an offer to buy or sell securities.
• Investments involve risks, and past performance does not guarantee future results.
• The report is not a substitute for professional advice.
• No liability is accepted for losses arising from the use of this report unless excluded by law.