20161103-招商证券_香港_-东阳光药-01558.HK-Recent_NDR_and_collaboration_with_TaiGen_Bio_updates_14页_1mb_1mb

HEC Pharm (1558 HK) Summary

Core Content

HEC Pharm is a Chinese pharmaceutical company that has been highlighted for its strong growth prospects in FY16E-18E. The company has recently hosted an investor NDR at its Dongguan site, with IR Director Eileen Wang accompanying the tour. The report emphasizes the company's promising growth, driven by its key product Kewei (oseltamivir phosphate), which has shown robust sales momentum in 9M16, contributing to its leading position in the niche market.

Main Points

• Kewei Sales Momentum:

  • Kewei remains a key growth driver for HEC Pharm.
  • Management attributed the growth to an expanded sales team (over 300 vs. 196 at FY15 y.e.) and penetration into new provinces like Beijing, Tianjin, Hebei, and Heilongjiang.
  • Forecasted growth rates for FY16E, FY17E, and FY18E are 55%, 42%, and 30%, respectively.

• Collaboration with TaiGen Bio:

  • A joint venture (HEC/TaiGen: 51:49) has been formed to develop new anti-Hepatitis C drugs.
  • TaiGen's Furaprevir, in phase II trials in Taiwan, is combined with HEC's Yimitsvir Phosphate to form a new Oral Interferon-free combined therapy, which has less competition than single therapy solutions.

• Financial Performance:

  • Revenue is projected to grow at 37%, 32%, and 25% in FY16E-18E.
  • Adjusted net profit is expected to increase by 24%, 30%, and 23% in the same period.
  • ROE and ROA are expected to improve, reaching 16.4% and 14.7% respectively by FY17E.

• Valuation:

  • Current P/E is 14.2x for FY17E, which is considered attractive compared to H-share peers averaging at 16.3x.
  • The target price is maintained at HK$20.0, implying a FY17E P/E of 16.4x and a PEG of 0.6x.
  • Valuation methods include DCF and P/E, with the target price derived from an average of both.

Key Financials (RMB mn)

Valuation Methods

DCF Valuation

• Implied share price: HK$15.7 to HK$17.96.
• FY17E P/E: 11.6x to 14.7x.
• WACC: 10.2% to 12.2%.
• Terminal growth rate: 1% to 3%.

P/E Valuation

• High end: 22.3x FY17E P/E, implying HK$27.09.
• Mid-point: 19.1x FY17E P/E, implying HK$23.28.
• Low end: 13.6x FY17E P/E, implying HK$16.55.
• Adjusted A-share listed peers are discounted by 14% based on Shanghai Pharma's A-share premium.

Risks

• Concentration Risk: Reliance on key products and markets.
• Higher SG&A Costs: Potential increase in selling, general, and administrative expenses.

Key Data

Shareholding Structure

Financial Model Highlights

• Income Statement:

  • Sales are projected to increase significantly, with EBITDA and net income also showing positive growth trends.
  • Profit before tax margin is expected to remain around 45% in FY17E and 44.3% in FY18E.
  • Net margin is forecasted to be 37.2% in FY17E and 36.8% in FY18E.

• Margins:

  • Gross profit margin: 63.4% in 2013A to 75.2% in FY17E.
  • SG&A expenses: 46.7% in 2013A to 33.0% in FY17E.
  • Distribution and selling expenses: 9.7% in 2013A to 16.0% in FY17E.
  • General and admin expenses: 37.1% in 2013A to 17.0% in FY17E.
  • EBITDA margin: 39.9% in 2013A to 46.7% in FY17E.
  • Net margin: 18.3% in 2013A to 37.2% in FY17E.

Conclusion

HEC Pharm is viewed as a strong investment opportunity due to its robust growth in key products, strategic collaboration with TaiGen Bio, and favorable valuation metrics. The report maintains a BUY rating with an unchanged target price of HK$20.0, reflecting confidence in its future performance despite the noted risks.