TP and valuation The stock is trading at only 17x/12x FY13/14E 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. Company visit confirms ST strong growth driven by exclusive drugs and sustainable LT growth prospect driven by strong TCM and biopharma drug pipelines. 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 soon2. National Class I new drug hNGF receives Drug Qualification Report soon.
How we differ from the market
Exclusive TCM drugs continue to drive ST strong growth We visited Hua Han’s major subsidiary DCX Pharma which accounts ~55% of Hua Han’s total sales in FY13. Manufacturing is based on order which ensures low inventory level. Order quantity has been rising, indicating strong market demand. Major and exclusive products such as Qijiao Shengbai Capsules, Fuke Zaizao Pills and Zhisou Huatan Pills (~22% of Hua Han’s FY13 sales) have seen strong growth with shipping volume growth of 50%, >20%, >20% respectively during Jan-April. Total shipping volume growth reached 36% during Jan-April and a growth of 38% is expected for 2013. Exclusive products have been marketing focus and we expect sales of exclusive products to account for 77%% of total sales in FY13 (FY12: 66%).
LT growth to accelerate driven by more exclusive NMIC drugs The company has chosen six exclusive TCM drugs and plans to add them into 2014 version National Medical Insurance Catalog (NMIC). We believe one or more products are very likely to be included in the NMIC given Hua Han’s strong PR capability and exclusivity of the products. Once the products have been included, they are likely to become new growth drivers from 2014. Hua Han has previously successfully added four exclusive products into the 2009 version NMIC from five product candidates. The sales contribution from these four products increased from 15.5% to 44.8% during FY09-13 with a sales CAGR of 73.9%.
Biopharma drug pipeline remains strong and will become future growth driver We also visited another subsidiary Factorr Biotech which currently sells one product Golden Peptides with estimates sales of HK$60M+ for FY13. Mgmt believes this product will have large potential given its exclusivity, significant health-improving effects and high GPM (>80%). We expect sales of Golden Peptides to reach HK$120M in FY14 with NP contribution of 7%. Sales may easily beat our expectation if nationwide marketing is launched successfully. The upcoming new product will be human Nerve Growth Factor (hNGF) which is currently undergoing final sample testing by SFDA. Mgmt is optimistic on the outlook since there have been no negative feedback so far and expects to receive a Drug Qualification Report on hNGF soon. The company aims to launch hNGF in 1H14 and expects 1st year sales volume to reach 300,000 which represent ~HK$370M. In addition, the company is preparing to build production lines for 3 biopharma drugs (Placenta Pills, Placenta Blood Albumin Injections and Placenta Tissue Fluid Injections) it recently acquired. Placenta Pills are expected to be launched in 2H13 (1HFY14) and Placenta Blood Albumin Injections and Placenta Tissue Fluid Injections are expected to be launched in 1H14 (2HFY14). Mgmt is optimistic on Placenta Tissue Fluid Injections given its wide indications, high extraction rate and expects a market potential of RMB1B. The company will focus more resources on developing and marketing biopharma drugs going forward and we expect sales proportion of biopharma drugs to gradually increase from 28% in FY12 to 40% in FY15.
Catalysts 1. Golden Peptides obtains health product approval2. hNGF obtains Drug Qualification Report.
Risks hNGF fails to obtain Drug Qualification Report.