Share placement is positive in the LT The company announced that it has agreed to place 58M shares to National Social Security Fund Overseas Investment Portfolio (NSSF) (57.42M) and ICBC Credit Suisse Asset Management (Intl) (0.58M) at a price of HK$2.02 per share which represents a discount of 10.6% to the closing price of HK$2.26 in the previous trading day. Total proceeds of HK$117.2M will be used for general working capital. The main purpose of this placement is to introduce NSSF which will have a LT positive impact on the company and stock price as investors may give the company a higher valuation premium based on NSSF’s reputation. The placing shares will have slight dilution effect as it just accounts for 1.86% of the existing issued share capital.
TP and valuation We adjust our FY13/14/15 EPS forecasts to HK$0.14/0.19/0.25(prev. HK$ 0.14/0.20/0.26). We adjust our TP to HK$ 2.8 (prev. HK$ 2.82) to reflect the dilution effect. The stock is trading at just 12x FY14E 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 15.5x. 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 consensusExclusive 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. 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.
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 FY13-152) 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 approval2) Product acquisitions completed
3) hNGF receives Drug Qualification Report.
Risks hNGF fails to obtain Drug Qualification Report.