On 24 Mar, Livzon Pharm reported RMB784m earnings for 2016, whilecore profit surged 27% y-o-y at RMB683m, in-line with ours but 12%fell short of Bloomberg consensus. Management’s update allowed usto conclude that, in 2017: (1) revenue to grow at mid-teens y-o-y; (2)drug price cut likely at 2%-4% y-o-y; (3) gross margin to stay at 64% asin FY16; and (4) its drugs in new national drug list subject to provincialdecision. Maintain BUY with higher TP at HKD54.85 on wider margin.
In-line FY16 result; 2017 sales likely decelerate.
Livzon reported RMB784m net profit in FY16 on 24 Mar. Its core earnings came inat RMB683m, surged 27% y-o-y, in-line with our estimate. Total revenue ofRMB7,652m, was up 16% y-o-y below ours RMB7,964m, on smaller hormone andbulk medicine sales. However, Urofollitropin and Leuprorelin Microspheres salessurged 26% and 31% y-o-y at RMB544m and RMB386m. Post discussion withManagement, we see (1) 2017’s total revenue will grow at mid-teens y-o-y (FY16:16%); (2) drug price cut likely at 2%-4% y-o-y and (3) drugs now under newNational Reimbursement List, like Ilaprazole, subject to the individual provincialdecision on the inclusion for reimbursement. On this reduced sales volume, we cutour FY17F-18F total revenue by 6%/7%. Note that, 2016’s sales from IlaprazoleEnteric Coated Tablets (digestive system) and Mouse Nerve Growth Factors(nerves repairing) jumped 52% and 64% y-o-y to RMB285m and RMB491m. OurFY17F-18F revenue growth now decelerates to 15% y-o-y each from 17%/16%.
Raising FY17F-18F profit on wider GPM.
2016’s gross margin (GPM) of 64.1% was wider than ours 63.5%, mainly onimproved production cost. On this, we edge up our FY17F-18F GPM to 64.8% from62.9% each year. Albeit FY16’s operating expenses (opex) to sales at 51.2% wasconsistent with our estimate, we raise our FY17F-18F opex to sales to reflect biggersales effort on sales volume boost in provinces. On wider GPM, our core earningsrises 3%/6% to RMB813m/ 967m in FY17F-18F.
SOTP-TP rises to HKD54.85 (from HKD51.20). Maintain BUY.
Our SOTP-TP now rises to HKD54.85 reflects 12.4x EV/EBITDA (old: 11.9x)(25.1xP/E), below sector’s target median at HKD13.0x. While its A-share’s valuation at15.2 x FY17F EV/EBITDA (30.5x P/E), is over 60% premium to its H-share multiplesof ~9.3x EV/EBITDA (21.0x P/E). We reckon that Livzon’s valuation, with a 17.5%EPS CAGR (FY16-19F) (9.4% EBITDA/s CAGR), is justified on its being (1) China’sleader of hormones and cephalosporin antibiotics; and (2) diversified medicalniches. Its R&D valuation for monoclonal antibodies, vaccines and liquid biopsy isestimated to be HKD6.66bn (or HKD15.30/s), not included in our TP, implying 28%of our current valuation. At the same time, Livzon also announced a 3-for-10 bonusshare issuance for its shareholders. Key risks: (1) more tough policy on drug tenderprices; and (2) stricter control of drug reimbursement claim.