Summary]:Investment highlights
3 new biopharmaceutical drugs acquired The company has signed an agreement to acquire three biopharmaceutical drugs (placenta blood albumin injections, placenta pills and placenta tissue fluid injections) from the Beijing National Vaccine & Serum Institute for a total consideration of RMB 22M. We estimate these products will contribute RMB ~24M to net profit during the first full year of sales, making the acquisition very cheap. The acquisition again demonstrates the management’s unique investment and execution capabilities.TP and valuation We raise our FY14/15/16 EPS forecasts to HK$ 0.193/0.264/0.343 (prev: HK$ 0.188/0.245/0.314). We also raise our EBIT margin assumption. We raise our TP from $2.80 to $3.27. The stock is currently trading at just 13.2x FY14E P/E, which is undervalued given our estimate for an FY13-15 earnings CAGR of 33.7% (excluding one-time gains/losses) and the sector average of 16x. We believe the valuation is attractive and we reiterate our Buy rating.
Key assumptions 1. Placenta pills are launched in 2H132. Placenta blood albumin injection and placenta tissue fluid injection are launched in 1H14 respectively.
How we differ from the market
New products holds large potential, long-term fast growth faster and more certain We estimate that the potential markets for these three products each exceed RMB10B. We expect placenta pills to be launched in 2H13 (1HFY14) and placenta blood albumin injections and placenta tissue fluid injections to be launched in 1H14 (2HFY14). As they will be used in new hospitals and with different provincial drug tendering schedules, we don’t expect significant first year sales, but we expect rapid sales in their second and third years. We conservatively estimate that total sales of these three products will reach HK$90M/315M/495M in FY14/15/16 respectively, contributing net profit of HK$16.9M/60.8M/94.5M (2.8%/7.2%/8.7% of total net profit). We believe these products will lead to more rapid long-term growth.
One catalyst already realized, waiting for another two catalysts We have mentioned that there are 3 short-term catalysts, now the first one has realized. Going forward, obtaining health product approval for Golden Peptides and obtaining a drug qualification report for its Class I new hNGF drug would act as another two positive catalysts. We conservatively estimate Golden Peptides would contribute 2.4%/2.4%/2.4% to total net profit in FY14/15/16 while hNGF would contribute 4.3%/5.7%/6.8%.
Catalysts 1. Golden Peptides obtains health product approval
2. hNGF obtains Drug Qualification Report.
Risks hNGF fails to obtain Drug Qualification Report.