20181112-招商证券_香港_-康臣药业-01681.HK-Unjustifiably_low_valuation_despite_solid_fundamentals_7页_1mb

Consun Pharma (1681 HK) Summary

Core Content

Consun Pharma (1681 HK) is a Hong Kong-listed pharmaceutical company that has demonstrated strong fundamentals and is currently undervalued according to the report. The report highlights the company's exclusive Iron Dextran oral solution, YuanLiKang, which has entered the 2018 Essential Drug List (EDL), providing a significant opportunity for growth. This product is expected to drive 30% revenue growth, and the company's market share gain from ID tablets is anticipated to further boost its performance.

The report also notes that the ASP (Average Selling Price) for Yulin products is expected to increase more gradually than initially anticipated, which should have a minimal impact on 2018 earnings. The company's financials have been revised slightly, with a -0.1% and +0.7% adjustment to its 2018/19E EPS, respectively.

Key Information

• Valuation: Consun is currently trading at a 7x 2019E PER, significantly lower than the industry average of 14x, leading to a 4% dividend yield.
• Dividend Yield: The company's dividend yield is expected to increase from 4% to 6% by 2020E.
• Capital Allocation: Consun has substantial net cash (RMB760mn at the end of 2018E), which provides flexibility for potential M&A.
• Target Price (TP): The TP remains unchanged at HK$11.95, suggesting a 125% upside from the current price.
• Financial Performance:
  • Revenue: Expected to grow from RMB1,223 mn in 2016 to RMB2,486 mn in 2020E.
  • Adjusted Net Profit: Projected to rise from RMB329 mn in 2016 to RMB643 mn in 2020E.
  • EPS: Fully diluted EPS is expected to increase from HK$0.40 in 2016 to HK$0.90 in 2020E.
  • Margins: Gross margin is maintained at 75%, and adjusted net profit margin is expected to remain around 25-26%.

Financial Ratios

• Growth:
  • Consolidated revenue growth is expected to slow from 47% in 2016 to 15% in 2020E.
  • Adjusted net profit growth is projected to decrease from 22% in 2018E to 18% in 2020E.
• Profitability:
  • Gross margin remains stable at 75%.
  • Adjusted net profit margin is expected to be around 27-28%.
  • ROE (Return on Equity) is projected to be 24.2% in 2018E and 23.9% in 2020E.
• Efficiency:
  • Inventory days are expected to increase slightly from 124 in 2016 to 162 in 2018E.
  • Accounts receivable days are expected to increase from 146 in 2016 to 177 in 2018E.
  • Accounts payable days are expected to decrease from 491 in 2017 to 422 in 2020E.
• Liquidity:
  • Free cash flow (FCF) is expected to rise from RMB381 mn in 2016 to RMB631 mn in 2020E.
  • Net gearing is projected to decrease from -32.6% in 2016 to -43.6% in 2020E.

Investment Rating

• Industry Rating: OVERWEIGHT, suggesting the pharmaceutical sector is expected to outperform the market.
• Company Rating: BUY, indicating the stock is expected to generate a 10%+ return over the next 12 months.

Market Performance

• Stock Price Performance: The stock has shown a 16.4% decline in the last month, a 44.0% decline in the last six months, and a 30.8% decline in the last 12 months.
• Market Cap: RMB4,639 mn.
• Average Daily Volume: 2.97 mn shares.
• Valuation Metrics:
  • P/E Ratio: 10.1x in 2018E, 7.9x in 2019E.
  • P/B Ratio: 2.3x in 2018E, 1.8x in 2019E.
  • P/S Ratio: 2.3x in 2018E, 2.1x in 2019E.

Competitive Position

• Peer Comparison:
  • Consun's 2019E P/E ratio is 16x, significantly lower than the industry average of 30x.
  • Its 2019E P/B ratio is 1.5x, compared to the industry average of 2.0x.
  • The company's dividend yield is higher than the industry average, at 4% in 2018E and 6% in 2020E.
  • Consun's ROE is higher than the industry average, at 24.2% in 2018E and 23.9% in 2020E.

Conclusion

Consun Pharma is currently undervalued despite its solid fundamentals and growth potential. The company's exclusive Iron Dextran oral solution is expected to drive revenue growth, and its strong cash position and potential for M&A make it an attractive investment. The report maintains a BUY rating with a target price of HK$11.95, suggesting a significant upside.