Robust results in 1H15
Fosun Pharma achieved revenue/reported profit of RMB5.9bn/882m in 1H15,representing 7%/29% YoY growth. Organic growth would have been 18% if wehad excluded the sale of distribution business and contribution of Erye Pharma.We highlight that the drug manufacturing segment achieved 22% growth vs.low teen for the industry due to the ramp up of new products, growth pickupof Aodejin, and contribution from Erye Pharma. On M&A, managementindicated its interests in new drugs and hospitals in tier 2 and 3 cities.
Solid growth in drug manufacturing and devices segments
Management indicated organic growth in 1H15 was 17.7% vs. 15.6% in 1Q15.The drug manufacturing business delivered YoY growth of 22% in 1H15 and13% if we exclude the contribution from Erye Pharma. The company indicatedthat growth for Aodejin was above 17% in 1H15. On new drugs, managementremained positive as Youdier achieved 50% growth in 1H15 and expectedsales for Youlitong to double. On medical devices, the impressive growth of34% in 1H15 was driven by sales of Da Vinci in China. Management continuesto expect ROI improvement from Da Vinci.
Reiterating strategy to develop the hospital segment
The hospital segment achieved 23/18% growth in sales and profit in 1H15.Importantly, Chancheng hospital delivered 29% growth in revenue andcontributed 74% of the segment revenue in 1H15. With 2,770 beds at present,Fosun will remain focused on tier 2 and 3 cities and target 800-1,000 beds inthese regions. Management guided one to two projects to be done in 2H15.
Maintaining target price of HKD28.5; risks
We maintain our target price of HKD28.5, based on 30x 2016E core EPS ofHKD0.77 and 56x non-core EPS from the hospital business of HKD0.09. Webelieve 30x is justified as the Hong Kong-listed drug peers are trading at 15xwith 20% growth (vs. 29% for Fosun). We believe Fosun deserves a premiumdue to its diversified revenue base and M&A firepower. For non-core EPS, webelieve 56x is justified as its Asian-listed peers are trading at 28x with 16%growth (vs. 23% for Fosun). We believe the M&A opportunities for Fosunwould lead to a premium. Key upside risks include more acquisitions, lesspricing pressure and a more rapid ramp-up of new products. Downside risksinclude less M&A, more pricing pressure and more dilution.