Anticipating modest recovery in 2H14 for core platform
The company now expects 1) 20% growth in the pharmaceutical segment for the full year, driven by growth recovery from Aohong and other key franchises; 2) 15-20% growth for Alma for the full year despite flat growth in 1H14; 3) more acquisitions in the hospital segment in 2H14 and 2015. While we continue to be impressed by management’s vision and execution, we await more visibility on high frequency data for a turn-around on its core drug platform.
Long-term growth objectives articulated; M&A remains key
Management anticipates revenue composition to change in the mid/long term, with c. 20-25% from hospitals, 55% from drugs and another 20-25% from device/medical consumables on a three-year horizon. Within five years, Fosun targets 20-30 hospitals under its umbrella. Additionally, Fosun intends to accelerate its overseas M&A. We believe Fosun is likely to have capacity to raise at least USD 600-800m debt to finance its overseas acquisition.
Aodejin growth recovery likely; more M&A likely in 2H14
We believe growth acceleration for Aodejin, the largest profit contributor, is highly likely in 2H14, as hospital data showed modest deceleration in 1H14 with 17% YoY growth vs. 28% in 2013, suggesting only a modest slowdown vs. a 16% decline for Aohong based on reported data. As such, we anticipate reported data to recover in 2H14 with potential inventory restocking. For 2H14 overall profit growth, we believe the following three elements are likely to help, sinopharm earning strength, 23% Aohong acquisition and more M&A, especially potential overseas M&A and hospital acquisitions.
Maintaining target price of HKD27; risks
While we believe additional M&A are largely reflected in the stock price, we highlight that any overseas M&A is likely to be accretive because Fosun is trading at 40x 2014E EPS, by our estimate while we expect acquisition multiples to be in the range of low-to-mid teens. However, multiple overseas acquisitions would lead to a key question of whether integration would be successful, as Fosun has no track record. Key upside risks include more acquisitions, less pricing pressure and a quicker ramp-up of new products. Downside risks include less M&A, more pricing pressure and more dilution from equity financing, as well as integration risks.