Achieved better margins in 2015; expecting solid growth for manufacturing
Fosun Pharma reported 2H15 revenue/core profit of RMB6.6bn/RMB774m,representing 3%/17% YoY growth. The higher profit growth in 2015 was duemainly to better margins and acquisitions and robust growth from Sinopharm.Organic revenue growth would have been 13% in 2H15, vs. 18% in 1H15, if weexclude the disposal of retail business and Handan Pharma, and the acquisitionof Erye Pharma. Organic revenue growth for drug manufacturing reached 17%in 2H15, vs. high single-digit growth for the industry, on strong performance ofCCV and metabolic drugs. Management is confident of double-digit growth formanufacturing going forward. Retain Hold on valuation.
Solid growth for drug manufacturing and device segments
The drug manufacturing business delivered YoY growth of 23% in 2H15, or17% if we exclude the contributions from Erye and Handan. We highlight thestrong performance of Youdier, Youlitong and EPO partly compensated for thegrowth decline in Aodejin, where production resumed in January. GM rosefrom 53% in 2H14 to 53.2% in 2H15 on product mix improvement. Given thediversified product portfolio, management is confident it can achieve doubledigitgrowth going forward. On medical devices, we believe the 3% growth in2H15 was due mainly to slow growth of Alma Lasers as well as seasonaladjustment. In 2015, the device segment achieved decent growth of 16%.
Stable growth for hospital business; expecting M&A in 2016
The hospital segment exhibited 11% organic revenue growth in 2H15. Wehighlight that Chancheng hospital achieved 22% growth and contributed 72%of the segment revenue in 2015. In 2015, the OPM for hospital businessimproved from 14% to 15%. The company is aiming to complete severalhospital projects and expand the network into more cities in 2016.
Raising target price (TP) to HKD21.6; risks
We raise our TP to HKD21.6 from HKD20.1, based on 23.5x 2016E core EPS ofHKD0.77 and 48x non-core EPS from the hospital segment of HKD0.07. Webelieve 23.5x/48x are justified as HK-listed drug peers are trading at 16x with20% growth (vs. 17% for Fosun), and Asia-listed hospital peers are trading at38x with 15% growth (vs. 37% for Fosun). We believe Fosun deserves apremium on its diversified revenue base and M&A firepower. Key risks includeprogress of M&A and new product launches, price cut magnitude and dilution.