TP and valuation The stock is trading at only 16.7x FY13E P/E, which represents a PEG of 0.5x based on our forecast for a FY13-15 earnings CAGR of 33.7% (excluding one-off gains/losses). This valuation is very attractive compared to the sector average of 20x P/E. As the recent price correction was not due to a change in fundamentals we believe it creates a good buying opportunity. We maintain our FY13/14/15 EPS forecasts of HK$ 0.14/0.19/0.26 and our TP of HK$ 3.27. Reiterate Buy.
Key assumptions 1. Health product Golden Peptide receives health product approval from Guizhou province soon
2. National Class I new drug hNGF receives Drug Qualification Report soon.
How we differ from the market
No need for financing in the short term The market may be worried that Hua Han may consider a share placement which may have been responsible for the recent price correction. However, the company’s mgmt has stated that it has no plans for any financing in the short term given its strong cash balance of HK$2.7B and healthy operating cash flow. The recent share placement to the National Social Security Fund was a one-off situationthe company believed that introducing the NSSF as a strategic investor will benefit its corporate image and shareholder structure. It does not expect any similar situations in the short term.
Guangdong drug tendering proposal has minimal impact on Hua Han The market also seems to be concerned about the potential impact that the newly issued Guangdong drug tendering proposal could have on the sector. Such a radical move is contrary to a rational drug tendering policy prioritizing drug quality over prices which is being adopted by Beijing and other provinces, and will trigger strong opposition from the central government and pharmaceutical companies. We believe this is unlikely to be rolled out in its current form. If it were rolled out in its current form, companies whose sales are mostly made up of exclusive drugs will be able to survive. Hua Han’s exclusive drugs account for >80% of total salesa change to the drug tendering policy in just one province would have a minimal impact on the company.
Catalysts 1. Golden Peptide receives health product approval2. hNGF obtains Drug Qualification Report. Risks hNGF doesn’t receive Drug Qualification Report.