Principal business growth in line with expectation, return for shareholder increases. Sales and NP increased by 13.4% and 48.7% respectively. Sales were lower than expected mainly due to accounting method change of certain sales and decrease of external sales of a Tibetan subsidiary in 2HFY12. Sales from principal business came in HK$1.52B, a YoY growth of 31.6%, in line with expectation. Disposal of shares in Magic Holdings resulted in one-time gain of HK$380M and grant of stock options to management resulted in expense of HK$52.4M. if excluding those one-time gain and expense, we estimate NP from principal business was HK$327M, in line with expectation. The Board proposed a final dividend of HK$3.4 cent per share and a special dividend of HK$5 cent per share, representing a dividend payout ratio of 61% (25% if excluding special dividend). In addition, the Board proposed 1 bonus share for every 5 existing shares.
TP and valuation We have revised our FY13-15 EPS forecasts to HK$ 0.19/0.24/0.30 (prev. HK$ 0.25/0.25/0.31). We have revised our TP to HK$ 2.21 (prev. HK$ 2.23). The stock is trading at only 8.3x FY13E P/E, which is undervalued relative to an FY13-15 earnings CAGR of 25.1% and sector average of 16.5x. Maintain Buy.
Key assumptions 1. hNGF is launched in 1Q13; 2. Sales volume for hNGF during FY13-15 is 54,000/135,000/243,000 vials.
How we differ from the market
Exclusive NMIC products continue to drive strong growth Strong growth of prescription drugs have largely come from four major products: Qijiao Shengbai Capsules, Zhisou Huatan Pills, Yi Fu, and Yi Bei whose sales growth reached 124%, 51% and 39% respectively. Considering the exclusivity, medical insurance coverage and high margins, we believe the company will continue to actively promote those products. Future growth will largely come from increase of hospital coverage and intra-hospital department coverage.
Nationwide promotion helped OTC product become another growth driver Sales growth of Fu Ke Zai Zao Pills and Capsules reached 55%, mainly due to soecific promotion targeting OTC product Fu Ke Zai Zao Pills. Currently the promotion has started in 8 provinces, with the product seeing significant growth. The promotions will expand to 20 provinces by the end of 2012. Additionally, the company revised up retail prices ~35%, and we expect sales growth to reach 76% in FY13 on broader promotions and price hikes. The proportion of Fu Ke Zai Zao Pills and Capsules sales to principal business sales is expected to increase from 21.3% in FY12 to 24.8% in FY13, making this product another growth driver.
hNGF is moving closer to launch and offers significant market potential, benefiting investors as free options Major standards of hNGF have been met and is waiting to be submitted to SFDA for qualification test. We expect the formal drug qualification report to be received by the end of 2012, which will clear the way for production approval. We expect it to be launched as early as 1Q13. hNGF has a potential market of at least RMB 7.5B in China, with no direct competitors. Our conservative forecasts indicate that during FY13-15 hNGF will contribute HK$ 14M/35M/63M in net profit (3.0/6.1/8.6% of total NP). As we believe the potential contribution is not currently priced in, this will benefit investors as a 'free option'.
New product human placenta blood albumin made breakthrough The company's cooperation project on human placenta blood albumin with National Vaccine & Serum Institute has been approved by its parent company China National Biotech Group and specific agreements were under negotiation. The factory has completed roof-capping and orders for equipments have been placed, we estimate it will start contributing profit in 2HFY14. Albumin held a market of more than RMB 7B with growth of over 30% in China in 2011. The company's albumin product is expected to become another blockbuster drug given high demand for albumin in hospitals and the shortage of blood in China. However due to lack of related sales experience, initial contribution may not be large, investors should not be too optimistic.
Sufficient cash, no need for financing from capital market Cash level reached HK$2.1B as of FY12. Future Capex on bio-products is ~HK$ 600M, cash is still sufficient even considering special dividend, normal working capital and future Capex for new plant construction, there is no need for financing from capital market.