20140313-DBS_Group-Marketing_takeaways__looking_for_decent_laggards_15页_512kb_512kb

Marketing Takeaways: Looking for Decent Laggards in the Healthcare Sector

Core Content Overview

The document outlines the current investment sentiment and valuation analysis for the healthcare sector, with a focus on identifying "decent laggards" — companies that are underperforming but show potential for growth. It highlights specific companies like Consun Pharmaceutical (1681 HK) and Microport Scientific (853 HK), and provides insights into their market position, financial performance, and future outlook.

Main Investment Themes

• High Valuation Caution: Investors are cautious about adding new positions to the healthcare sector due to its stretched valuations (1-yr forward PE of 23x, 0.25 SD above historical average since 2009).
• Double Digit Growth: Despite the high valuation, the sector remains attractive due to double-digit market size growth driven by an aging population and increased government support.
• Focus on Laggards with Earnings Growth: Investors are looking for companies within the sector that demonstrate decent earnings growth, such as Consun Pharmaceutical (1681 HK).

Key Companies Highlighted

Consun Pharmaceutical (1681 HK)

• Earnings Growth: Consun has shown a 30% CAGR in earnings from 2012 to 2015, driven by its key product, Uremic Clearance Granule (UCG).
• UCG Overview:
  • Market Position: UCG accounts for ~70% of Consun's profit and is used to treat kidney failure, helping to delay dialysis.
  • Cost Efficiency: Annual treatment cost for UCG is Rmb6,000, significantly lower than alternatives like Shenkang Injection (Rmb10,000+) and Haikunshenxi Capsule (Rmb8,400–10,000).
  • Market Penetration: Currently, less than 100,000 out of 57 million kidney failure patients use UCG, indicating substantial growth potential.
• Growth Drivers:
  • Body Check Trends: The number of people undergoing body checks in China has surged from 90 million in 2003 to 344 million in 2011. Body check packages often include kidney function tests, increasing awareness of kidney failure.
  • Government Support: Increased reimbursement ratios for kidney disease treatment in several provinces and under the New Rural Cooperative Medical Program.
• Valuation:
  • Trading at 21.7x FY14F PE, lower than the average of finished drug makers (25x).
  • Target Price: HK$7.7, with a recommendation of "Buy".
• Future Growth:
  • Expected 30% earnings CAGR for 2012–2015, based on UCG capacity growth (53% CAGR).
  • Plans to launch 7 new products from 2014 to 2021, which could provide additional earnings upside.

Microport Scientific (853 HK)

• Business Focus: 80% of earnings come from drug eluting stents (DES), with a major growth driver being the acquisition of OrthoRecon, an orthopaedic product maker.
• Integration Concerns: Investors are cautious about integration costs, but these are already factored into the valuation.
• Earnings Forecast: Expected to grow by 42% in 2015, with potential earnings contribution from OrthoRecon starting that year (~Rmb66m, ~18% of FY15F earnings).
• Valuation: Trading at 26.6x FY14F PE, with a recommendation of "Buy".

Key Financial Metrics

Market Size and Growth

• The healthcare sector in Hong Kong has seen a >200% increase in market capitalisation over the last two years, outperforming the Hang Seng Index (19% growth).
• The sector is expected to grow at a double-digit rate due to an aging population and increasing government support.

Key Questions and Concerns

• UCG Long-Term Demand: Will the low awareness of kidney failure among patients continue to limit UCG adoption?
• Consun's Distribution Efficiency: Compared to Jilin Changlong (8049 HK), Consun has lower distribution costs (~30% vs. ~60%), better cash conversion cycle (23 days vs. >200 days), and more efficient operations.
• Jilin Changlong's Cash Management: High distribution costs and retail price mark-up raise concerns about cash flow and profitability.

Product Comparison in Kidney Failure Treatment

Conclusion

The healthcare sector in China is growing rapidly, but valuations are stretched. Investors are focusing on companies with strong earnings growth and growth potential, particularly "laggards" that are undervalued but have a solid foundation. Consun Pharmaceutical (1681 HK) stands out due to its strong product performance, increasing market awareness, and potential for new product launches. Microport Scientific (853 HK) is also viewed as a growth opportunity, driven by its acquisition strategy and diversification into orthopaedic products. Overall, the sector remains attractive for long-term growth, but investors are selective due to current valuations.