20170321-招商证券_香港_-华润医药-03320.HK-All_eyes_on_M_A_execution_12页_1mb_1mb

China Resources Pharm (3320 HK) Summary

Core Content

China Resources Pharm (3320 HK) is a major player in the pharmaceutical and healthcare sector, with a strong focus on M&A as a key driver for future growth. The company reported FY16 results that exceeded expectations, primarily due to the expansion of its distribution segment into new provinces and the performance of its regional players. Despite a slight decline in net profit due to RMB depreciation and one-off expenses, the recurring net profit was higher than expected.

Main Points

• FY16 Performance:

  • Revenue reached HK$157 billion, up 7% YoY in HK$ terms or 14% in RMB terms.
  • Net profit was HK$2.8 billion, down 1% YoY, but recurring net profit was HK$2.9 billion.
  • Gross margin narrowed by 40 basis points to 15.4%, due to the lower margin in the distribution segment.

• M&A Strategy:

  • Management emphasized M&A as a key focus for FY17, aiming to expand the distribution network and acquire regional players with good quality.
  • On the manufacturing side, the company is targeting synergistic products and overseas quality assets.
  • There is a focus on improving minority interest management, although the indicative timetable for future M&A is not yet known.

• Financial Forecasts:

  • Revenue forecasts for FY17E and FY18E were revised upwards by 5‰ and 7%, respectively.
  • Adjusted net profit is expected to grow by 15.6% and 18.2% in FY17E and FY18E.
  • The company's diluted EPS is projected to increase, and DPS is expected to rise as well.

• Valuation and Target Price:

  • The stock is currently trading at 17x FY17E P/E, which the analysts believe is justified by its industry leadership and growth potential.
  • The new target price is set at HK$10, representing a 11% potential upside, with a P/E of 19x and a PEG of 1.1x.
  • The target price is derived from the highest mid-point of three valuation methods: DCF, P/E, and PEG.

Key Financials

Valuation Methodologies

1. DCF Valuation:

   • Implied value: HK$47,950 to HK$70,947.
   • Implied 2017E P/E: 14.3x to 21.2x.
   • Implied TP: HK$7.6 to HK$11.3.

2. P/E Valuation:

   • Implied value: HK$57,887 to HK$68,357.
   • Implied 2017E P/E: 17.3x to 20.4x.
   • Implied TP: HK$9.2 to HK$10.9.

3. PEG Valuation:

   • Implied value: HK$51,066 to HK$62,417.
   • Implied 2017E P/E: 15.3x to 18.7x.
   • Implied TP: HK$8.1 to HK$9.9.

Risks

• Further RMB depreciation.
• Weaker industry growth.
• Difficulty in expanding the distribution network.
• Uncertainties from future M&A and potential dilution.
• Relationship with key subsidiaries.

Analysts and Contact

• Analysts: Milo Liu, Hayden Zhang
• Contact Information:
  • Milo Liu: +852 3189 6711, miloliu@cmschina.com.hk
  • Hayden Zhang: +852 3189 6354, haydenzhang@cmschina.com.hk

Additional Information

• Market Cap: HK$56,372 million.
• Avg. Daily Volume: 3.04 million shares.
• BVPS (HK$): 5.99.
• Shareholding Structure:
  • China Resources National Corporation: 53.0%
  • Beijing Pharmaceutical Investment Ltd: 17.7%
  • Hengjian Intl Investment: 4.6%
• Free Float: 34.5%

Related Research

• CR Pharm (3320 HK) - Pharmaceutical behemoth to ride on industry secular growth (14 Dec 2016)

Summary of Forecast Changes

Conclusion

China Resources Pharm is expected to benefit from its strong distribution growth and strategic M&A focus. The updated forecasts show positive growth trends, and the analysts have maintained a BUY rating with a revised target price of HK$10, reflecting the company's strong position in the industry and growth prospects. However, the company must manage potential risks related to currency fluctuations, industry growth, and M&A execution.