20170406-中国银河国际证券-China_Healthcare_2016_Results_Round-up_21页_1mb

China Healthcare Sector 2016 Results Summary

Core Content

The document provides an analysis of the performance of the China healthcare sector in 2016 and outlines the stock-picking strategy for the remainder of 2017, influenced by recent policy changes and market dynamics. It also highlights the impact of new policies such as the two-invoice-system, the National Reimbursement Drug List (NRDL), and the Fujian medical insurance payment policy, which are expected to shape the future of the industry.

Main Points

1. 2016 Results Review

• Big manufacturers outperformed: Large drug manufacturers outperformed smaller ones, driven by:

  • Attractive valuations after underperformance in 2016
  • Positive impact of the new NRDL
  • Strong 2016 annual results
  • Beneficial effects of stringent regulations (e.g., generics consistency evaluation and medical insurance payment reforms)

• Leading distributors stood out: The implementation of the two-invoice-system supported big distributors, promoting consolidation in the sector.

• Hospitals underperformed: Hospitals faced challenges due to:

  • Reduction in drug revenue percentage to 30% of total revenue
  • Zero price mark-up for drugs (except TCM), shifting drug sales from profit to cost centers
  • Limitation on drug sales growth to 10% YoY and ongoing medical insurance payment reforms
  • Expected two more years for reform completion

Key Policies and Their Impacts

2. National Medical Insurance Payment Policy (2017)

• The Fujian policy serves as a potential model for national reforms.

• Key elements:

  • Drug classification (therapeutic, supplementary, nutritional)
  • Encouragement of hospital negotiations with manufacturers post-tendering
  • Mandatory price negotiations between hospitals and manufacturers
  • Lower reimbursement ratio for non-competitive drugs (e.g., original drugs, FDA-approved drugs, and generics with consistency evaluation)

• Impact: These policies shift benefits from manufacturers to hospitals and patients, but the low reimbursement ratio for non-competitive drugs may be adjusted at the national level to support innovative drugs.

Definite Beneficiaries of the Two-Invoice System

3. Two-Invoice System (2018 Implementation)

• Objective: Reduce distribution layers and promote consolidation in the pharmaceutical distribution sector.
• Expectations:
  • Smaller companies without strong sales networks are likely to fail.
  • M&A opportunities are expected for leading distributors.
  • Recommended stocks:
    • SINOPHARM [1099.HK]
    • SH PHARMA [2607.HK]
    • CR Pharm [3320.HK]

Investment Thesis and Recommendations

4. Investment Logic and Stock Picks

• Luye Pharm [2186.HK]: BUY – Strong product portfolio and R&D pipeline.

• CTCM [570.HK]: BUY – Strong growth in CCMG and TCM, benefits from zero-price mark-up for TCM.

• CSPC [1093.HK]: HOLD – Positive fundamentals, but valuation concerns.

• 3SBio [1530.HK]: HOLD – Strong R&D and innovation focus.

• TUL [3933.HK]: HOLD – Stable 6-APA prices, potential for margin improvement.

• Vitamin C Price Rebound: CSPC’s vitamin C business is expected to significantly boost profits in 2017 due to price increases.

CCMG (Concentrated Chinese Medicine Granules) Outlook

• CCMG Growth: Strong performance in H2 2016 (+22% YoY) confirms positive outlook.

• Growth Drivers:

  • Non-TCM hospitals not included in drug revenue percentage calculation
  • 25% markup allowed for TCM, including CCMG
  • Expansion of hospital coverage and average sales per hospital
  • Medicine dispensing machines reduce TCM decoction management costs
  • Eastern China (36% of sales) has strong medical insurance policies for CCMG
  • Production capacity expansion targets 3x and 2.5x current levels in 3 years

• Performance Highlights:

  • Revenue growth expected to exceed 20% CAGR for 2017–2018
  • Gross margin is expected to maintain ~60%
  • CTCM is highlighted as a BUY due to its strong position in the CCMG market

Summary Table

Conclusion

The China healthcare sector in 2016 saw strong performance from large manufacturers and distributors, while hospitals struggled due to ongoing reforms. The two-invoice-system and NRDL are expected to continue driving consolidation and value creation in the sector. CTCM and Luye Pharm are highlighted as key beneficiaries of the TCM zero-price mark-up policy and CCMG market expansion. The national medical insurance payment policy remains a major uncertainty for 2017, but the sector overall is expected to benefit from continued reform and innovation support.