Robust organic profit growth achieved
Fosun reported revenue/non-GAAP EPS of RMB3.2bn/0.19 in 1Q16,representing YoY growth of 15.2%/16.2% respectively, vs. 4.7%/24.4% in 2015.We attribute the strong results to solid growth in all segments as well as bettermargins. Excluding the sale of Handan Pharma, the organic growth for revenueand net profit would be 16.9% and 16.5% in 1Q15. We highlight that organicprofit growth excluding the Sinopharm contribution was 21.8% in 1Q16, vs.10%/-1% in 2015/2014 respectively. For 2016, management remains confidentof achieving the profit target outlined in the incentive plan. Maintain Hold onvaluation.
Healthy growth in core businesses
The manufacturing business achieved growth of 12.6% in 1Q16, while organicgrowth was approximately 15%, similar to the 14.8% in 2015. Managementhighlighted Youdier and Youlitong achieved approximately 80% growth in1Q15, while sales of Aodejin slightly declined in 1Q16. Management indicatedthat sales of Aodejin had returned to the normal level after resumingproduction at the end of Jan. For hospital services and medical devices, bothsegments achieved healthy double-digit growth in 1Q16. Managementindicated that the number of beds is likely to stay the same in 2016, while over6,000 beds are likely to be in operation for existing projects in three years.
On margins, R&D and tax reform
GM and OPM were 50.8%/14.6% in 1Q16, vs. 48.5%/12.3% in 1Q15respectively, driven by faster growth in high margin products, includingYourdier, Youlitong and Artesunate. On R&D front, the company expects fivenew product approvals in 2016. On the implementation of the two-invoicesystem, the company estimated RMB1bn impact in 2016 with about 80% ofthe impact likely to be realized in 2H16.
Maintain target price of HKD21.6; risks
We maintain our TP of HKD21.6, based on 23.5X 2016E core EPS of HKD0.77and 48x non-core EPS from the hospital segment of HKD0.07. We believe23.5x/48x is justified, as HK-listed drug peers are trading at 17x with 22%growth (vs. 19% for Fosun), and Asian-listed hospital peers are trading at 39xwith 15% growth (vs. 37% for Fosun). We believe Fosun deserves a premiumon its diversified revenue base and M&A firepower. Key upside risks includemore M&A and downside risks include delayed product launches, price cuts.