Interim results in line with expectation Overall, 1HFY13 sales and NP increased by 14.6% and 20.5% YoY respectivelysales of principal business grew 35.1%. If we exclude one-off gains and options expenses, actual NP grew by 26.3%, in line with our expectation. NP grew slower than sales due to an increase in selling cost/sales ratio from 39.8% to 43.4% as a result of intensive marketing to cover more hospitals. Sales in its TCM and Biopharma businesses grew by 28.3% and 53.8% respectively. The Board has not proposed an interim dividend, but we believe the final dividend for FY13 may increase to deliver better returns to shareholders since the company has accumulated cash of HK$2.7B, which is more than enough considering normal working capital and capex.
TP and valuation We maintain our FY13/14/15 EPS forecasts of HK$ 0.14/0.20/0.26. We raise our TP to HK$ 2.82 (prev. HK$ 2.17) to reflect faster LT growth driven by more exclusive National Medical Insurance Catalog (NMIC) products. The stock is trading at just 15.2x FY13E P/E, which we believe is undervalued given our forecast for a CAGR in earnings of 28.8% in FY13-15, and the sector average of 17.4x. Maintain Buy.
Key assumptions 1) Hua Han receives Drug Qualification Report for Human Nerve Growth Factor (hNGF) and health product approval for Golden Peptides and completes product acquisitions in the ST2) One or more exclusive products are included in the 2014 NMIC.
How we differ from consensus
Exclusive products continue to drive strong growth The strong growth in prescription drugs has largely come from four exclusive products: Qijiao Shengbai Capsules, Zhisou Huatan Pills, Yi Fu & Yi Bei whose sales growth reached 74.9%, 24.2% and 39.3% respectively. Given their exclusivity, medical insurance reimbursements and high margins, we believe the company will continue to actively promote these products. Future growth will mainly come from an increase in hospital coverage and intra-hospital department coverage. Sales of exclusive OTC drug Fu Ke Zai Zao Pills (including capsules) grew by 44.7% and partly benefited from a retail price hike. Future growth will come from promotions in more provinces and coverage of more pharmacies. Sales of these five products accounted for 71.1% of the company’s principal business.
ST catalysts to drive stock price higher We expect at least three ST catalysts to drive the stock price higher: 1) Hua Han will receive health product approval for Golden Peptides which are used to boost immune system soon given Hua Han’s strong PR capability and the shorter time required for health product approval compared to drugs. We forecast this will contribute 2.9%/3.2%/3.5% of total NP during FY13-15
2) Hua Han will complete the acquisitions of three products soon given the parent company of the owner of these products has approved the transaction. Of the three, Human Placenta Blood Albumin is especially promising due to the shortage of similar drugs in hospitals. We forecast it will contribute 2.3%/5.2% of total NP in FY14/153) Hua Han will receive the Drug Qualification Report for its Category I new drug hNGF soon given it usually takes less than six months for issuance of this kind of report and there has been no negative feedback indicating the drug doesn’t meet the standards. We forecast it will contribute 3.4%/5.9%/8.1% of total NP during FY13-15. We believe the three products will become future growth drivers.
LT growth to accelerate driven by more exclusive NMIC drugs The company has chosen six products which it plans to add to the 2014 NMIC. We believe one or more products are very likely to be included in the NMIC given Hua Han’s strong PR capability and the exclusivity of the products. Once the products have been included, they are likely to become new growth drivers from 2014 and will drive an increase in the company’s LT growth. As an example, Hua Han successfully added four exclusive products into the 2009 NMIC out of a possible five products. The sales contribution from these four products increased from 15.5% to 44.8% during FY09-13 with a sales CAGR of 73.9%.
Catalysts 1) Golden Peptides receive health product approval
2) Product acquisitions completed
3) hNGF receives Drug Qualification Report.
Risks hNGF fails to obtain Drug Qualification Report.