On 11 July, Livzon announced its 1H17 preliminary result of reported net profit between RMB491m to RMB532m （+20%-30% y-o-y）。 We expect its 1H17 core profit to be RMB472m, up 30% y-o-y. Excluding the impact of land disposal gain of RMB3.5bn at end-3Q17, we raise our FY17F-19F core profit forecast by 16%/21%/24%, on bigger sales and wider margins. Maintain BUY with higher SOTP-TP at HKD52.50.
Expect 1H17 core profit to surge 30% y-o-y.
　　On 11 July 17, Livzon announced its 1H17 preliminary result, having its net profit attributable to shareholders between RMB491m to RMB532m （+20%-30% y-o-y）。 On our forecast, we expect its 1H17 underlying profit to be RMB472m, up 29.8% y-o-y, with its reported earnings to come in at RMB509m. This will be supported by modest 1H17 revenue growth at 12.4% y-o-y, coupled with improved gross margin （GPM） at 65.5% from 1H16 of 64.2% （1Q17: 65.6%）。 Revenue growth will likely be driven by good sales from （1） Ilaprazole （壹丽安） at 40% y-o-y; （2） Leuprorelin Microspheres （贝依） at 35% y-o-y; （3） Mouse Nerve Growth Factor （丽康乐） at 32%y-o-y; （4） bulk medicine at 13%y-o-y, making up 37% of 1H17 total （1H16: 34%）。
　　Edging up FY17F-19F revenue 2%-3%.
　　With these sales drivers continuing to glow in FY17F-19F, Livzon announced on 1 Jun 2017 that it entered a contract with another domestic drug-maker to supply Acrabose bulk medicine （anti-diabetic drug） from May 2017 to May 2019. The total sales amount will be RMB481m. So, we lift our full-year FY17F-19F bulk medicine forecast by 7%/12%/8%, making up 23%-24% of total. Albeit of Urofollitropin’s sales to decelerate in FY17F at 19% y-o-y from FY16’s 26% y-o-y, we raise our hormone sales estimate at 5% each in FY17F-19F on bigger Leuprorelin （贝依） sales. All in all, we edge up our FY17F-19F revenue forecast by 2%-4%.
　　Raising FY17F-19F earnings 16%-24%.
　　In light of bigger sales from wider-margin products including Ilaprazole, Leuprorelin and bulk medicine from Acarbose sales, we inch up our GPM forecast in FY17F-19F by 70/140/200 bps to 65.5%/66.2%/65.3% respectively. With its one-time land disposal gain of RMB3,455m at end-3Q17, our finance cost is cut 66% in 2017 with FY18F-19F turning to a net gain of interest income at RMB25m/37m respectively. As such, we raise FY17F-19F earnings by 16%/21%/24%.
　　SOTP-TP lifts to HKD52.50 （from HKD41.83）。 Maintain BUY.
　　Rolling forward our SOTP valuation’s base year to FY18F, our new TP of HKD52.50 reflects 21.9x FY18F P/E （from 21.1x） and 11.0x EV/EBITDA, at par to sector’s target EV/EBITDA median. We deem the stock’s premium P/E valuation （vs sector target median at 17.7x） is justified on its being （1） diversified specialty drug-maker; （2） leader of China’s hormone drugs; and （3） branded supplier of various bulk medicines （eg Acarbose）。 While its R&D valuation is estimated to be HKD8.5bn （or HKD15.50/s）， not included in our TP, implying 29.5% of our current valuation.