20171013-招商证券_香港_-康臣药业-01681.HK-Growth_on_track,_valuation_still_attractive_6页_1mb

Consun Pharma (1681 HK) Summary

Core Content

• Company Overview: Consun Pharma is a Hong Kong-listed pharmaceutical company specializing in the TCM (Traditional Chinese Medicine) segment.
• Recent Performance: The company is on track to meet its full year guidance, with management expressing confidence in sales recovery for contrast media products in the second half of 2017 (2H17E), attributed to re-entering the Guangdong market through tenders. Guangdong historically contributed 20% of contrast media sales.
• Earnings Forecast: The company's core earnings per share (EPS) for 2017 and 2018 were slightly raised by 0.4% and 0.3% respectively, with estimates 10% and 5% above Bloomberg's consensus.
• Valuation: Consun is undervalued compared to TCM peers, with a 2017E/2018E PER of 11x and 10x, which is 29% and 27% below the weighted average of peers. The projected earnings growth is 30% in 2017E and 13% in 2018E.
• Investment Recommendation: The analysts maintain a BUY rating with a target price of HK$8.4, representing a potential upside of 34% from the current price of HK$6.3.

Main Points

• Sales Recovery: The contrast media division is expected to recover in 2H17E, with a predicted 11% YoY growth, reversing the 11% YoY decline in 1H17. The overall contrast media division is expected to have flat sales for FY17E, compared to the previous CMS estimate of a 6% YoY decline.
• R&D Progress: Consun has three contrast media products in its R&D pipeline. It is expected to receive the production license for Lopamidol in 4Q17E and commercialize it in FY18E. Additionally, the company expects its new drug for diabetic nephropathies to gain CFDA clinical trial approval by the end of FY17E.
• Financial Highlights:
  • Revenue: Expected to grow by 38% in 2017E and 18% in 2018E, with a consolidated revenue forecast of RMB 1,687 mn and RMB 1,991 mn respectively.
  • Profitability: Adjusted net profit is projected to increase by 30% in 2017E and 13% in 2018E, reaching RMB 428 mn and RMB 483 mn.
  • EPS: Fully diluted EPS is expected to rise to HK$0.62 in 2018E, up from HK$0.58 in 2017E.
  • PER: Adjusted PER is projected to be 10.8x in 2017E and 10.2x in 2018E, significantly below the sector average of 15x and 14x.
  • PBR: The price-to-book ratio is expected to decline to 2.6x in 2018E from 3.0x in 2017E.
• Valuation Bridge: The SOTP valuation is calculated at HK$8.4 per share, or 14x 2018E P/E, using different multiples: 16x for Other RX products, 12x for OTC products, and a 50% NAV discount for Yulin's redevelopment project.

Key Information

• Market Cap: HK$5,217 mn.
• 52-Week Range: HK$3.7 - HK$6.88.
• Average Daily Volume: 0.81 mn shares.
• Dividend Yield: 3%.
• Shareholding Structure:
  • Founder and management: 40.7%
  • Young Wai Po: 13.3%
  • Hony Capital: 4.9%
  • Free float: 40.9%
• Financial Ratios:
  • Gross Margin: Expected to remain stable at 74% in 2017E, with a slight decline in 2018E to 73%.
  • Adj. Net Profit Margin: 25% in 2017E and 24% in 2018E.
  • ROE: Expected to rise to 24.4% in 2017E and 26.9% in 2018E.
  • FCF: Expected to increase to RMB 457 mn in 2018E.
  • Net Gearing: Negative in 2017E at -10.5% and is expected to remain negative in 2018E at -23.5%.

Sector Comparison

• Sector: Pharmaceutical & Healthcare.
• Sector Performance:
  • Hang Seng Index: 28,390.
  • HSCEI: 11,411.
• Consun's Position: Consun remains the top pick in the TCM segment due to its strong growth potential and attractive valuation.

Key Figures and Tables

• Revenue Breakdown (2017E):
  • Legacy Consun Revenue: RMB 1,065 mn.
  • Yulin Revenue: RMB 623 mn.
• Earnings Revisions:
  • Adjusted net profit is expected to increase by 0.4% in 2017E and 0.3% in 2018E.
• Consensus Table:
  • TCM average PER: 18.3x (2017E), 15.3x (2018E).
  • TCM average PBR: 2.1x (2017E), 1.7x (2018E).
• Investment Ratings:
  • Industry Rating: OVERWEIGHT.
  • Company Rating: BUY.

Conclusion

Consun Pharma is showing positive signs of recovery in its contrast media division and has a strong R&D pipeline. Its valuation is considered attractive compared to TCM peers, and the company is expected to generate strong earnings growth in the coming years. The analysts maintain a BUY recommendation with a target price of HK$8.4, indicating confidence in its future performance.