TP and valuation. W TP and valuation. We lower our 2012/13/14 EPS forecasts toRMB0.80/0.92/1.05 (prev RMB0.92/1.05/1.14) and cut our TP from HK$10.26 to HK$9.86. Thecompany is trading at 12.8x 13P/E, which we see as demanding given our NP CAGR forecast of11.4% in 2013-15 and a hist avg of 10x. Reiterate Underperform.
Key assumptions. 1. Sales volume growth of Qingkailing, Shenmai and Shu Xue Ning injectionsare 10%/10%/10% respectively for 2012-14; 2. Distribution costs/sales ratios are22%/20%/18% for 2012-14.
How we differ from the market.
2012 results may miss market expectation, distribution channel reform may continue toimpact 2013 We expect NP to decline by 12.7%, which is 6% lower than BB consensus mainlydue to 1) higher-than-expected selling costs arising from more advertisement expense; 2) slowerthan expected distribution channel reform which has slowed sales growth of injections, softcapsules and granules products. We expect this to continue to impact sales growth in 2013. TCMinjection product sales (~58% of total sales in 2012) are under pressure on the back of adversedrug reactions.
Catalysts 2012 results miss market consensus.
Risks 1. Distribution channel adjustment faster than expectation; 2. Qingkailing and Shenmaiinjections are included into EDL Unified Pricing List.