20180103-招银国际-康臣药业-01681.HK-Underappreciated_TCM_manufacturer_26页_2mb

Summary of Consun Pharma (1681 HK) Analysis

Core Content

Consun Pharma (1681 HK), a subsidiary of China Merchants Bank, is an underappreciated TCM manufacturer with strong growth potential. The company is initiated with a BUY rating and a target price of HK$8.60, implying an 18.3% upside potential from the current price of HK$7.27. This analysis highlights the company's core products, market position, financial performance, and growth drivers.

Main Points

1. Market Leading Renal TCM with Proven Efficacy

• UCG (Uremic Clearance Granule) is the core product, a modern TCM medicine for treating chronic kidney disease (CKD).
• It has been proven to slow down the worsening of CKD and postpone dialysis.
• UCG holds 10.8% market share in the CKD drug market in 2015 and is included in both the Essential Drug List (EDL) and the National Reimbursement Drug List (NRDL), with its status elevated from category B to A in 2017.
• Penetration rate is currently low at 1.3%, but with the support of the NRDL and increasing awareness of CKD, the product is expected to grow significantly.
• The revenue CAGR for UCG in 2016-19E is forecasted at 12.1%.

2. Stable Growth from Medical Contrast Medium Products

• GD Injection is a key product used in MRI imaging, with a 21.4% market share in 2016.
• The product is expected to benefit from the increasing number of MRI installations in China.
• The company plans to launch Iopamidol Injection, an X-ray contrast medium, in 1H18.
• Iopamidol is currently dominated by the original drug manufacturer Bracco (95.2% market share), but Consun's entry is expected to add growth momentum.
• The contrast medium market in China is highly concentrated, with only a few manufacturers.

3. Revitalizing a Well-Known TCM Brand – Yulin Pharma

• Yulin Pharma is one of the most well-known TCM brands in China, recognized as a "Chinese Time-honored Brand" and "Chinese Well-known Trademark".
• After the acquisition, Consun has improved operation and management, and revenue growth for Yulin has shown significant improvement.
• Yulin's revenue grew 31.0% in 2016 and 25.5% in 1H17, with a strong rebound in major products.
• The top three products – Shiduqing Capsule, Zheng Gu Shui, and Jigucao Capsule – account for 83% of Yulin's revenue in 1H17.
• The core net profit CAGR for the company in 2016-19E is 19.6%, driven by both Yulin and core product growth.

4. Financial Outlook

• Total revenue is forecasted to grow at 36.7% / 16.0% / 15.0% in 2017E / 2018E / 2019E.
• Core net profit is expected to grow at 31.8% / 12.8% / 15.0% in 2017E / 2018E / 2019E.
• Gross margin and core net margin are expected to mildly decline due to the lower margin of the Yulin business.
• PER for 2017E / 2018E / 2019E is 15.9x / 13.9x / 12.1x, indicating undervaluation.

Key Information

• Investment Summary: Consun is undervalued, with strong brand equity and product portfolio. The company is expected to grow at a faster rate than the industry.
• Market Share:
  • UCG has 10.8% market share in CKD drugs in 2015.
  • GD Injection has 21.4% market share in the medical contrast medium market in 2016.
• Growth Drivers:
  • UCG: Proven efficacy, inclusion in EDL and NRDL, and increasing awareness.
  • GD Injection: Increasing MRI installations in China.
  • Yulin: Strong brand and product portfolio, improved management, and expanded sales channels.
• Launch Plan: Iopamidol Injection is expected to be launched in 1H18, adding growth momentum.
• Valuation: Based on DCF model, with WACC at 9.4% and terminal growth at 3%, the target price of HK$8.60 is set, implying a 18.3% upside potential.

Investment Risks

• Slower than expected growth in UCG penetration.
• Significant price cuts in major products.
• Weak R&D capabilities.
• Slower than expected growth for Yulin business.

Company Background

• Consun successfully acquired Yulin Pharma in 2015, increasing its equity stake to 70.7% by 2016.
• Yulin has a strong brand reputation and diverse product portfolio.
• The company has over 74 licenses for medicines in 9 dosage forms, with 20 exclusive products and 11 listed in EDL.
• The company is expected to expand into OTC sales, increasing its reach to 260,000 drug stores in China.

Conclusion

Consun Pharma is a promising TCM manufacturer with strong growth potential in both its core renal TCM product and its medical contrast medium business. The company has a solid brand portfolio and is well-positioned for growth due to its improved management and strategic acquisitions. Despite some risks, the company is undervalued and presents a compelling investment opportunity.