2H12 miss was expected; anticipating strong recovery in 2013 and beyond
Shineway reported 2H12 revenue/net profit of RMB1,130m/RMB293m, vs consensus of RMB1,099m/RMB325m. These imply 21% and -8% YoY growth, vs. -4%/-19% YoY in 1H12, strongly suggesting that the recovery is well on track. We model 22%/12% growth for FY13E revenue/EPS and reiterate Shineway as one of our top picks.
Repositioning Shineway for next phase of growth
Our long-term thesis is mostly based on Shineway’s product exposure in high-growth regions, specifically rural areas where growth is higher than the 20% industry average. Management indicated that 1) pricing pressure has largely faded; instead, the company may increase prices for a few OTC products in 2013; 2) flagship products remain competitive based on pricing; 3) sales force reorganization has largely been completed; 4) new facilities passed new GMP in 4Q12; and 5) the supply shortage for flagship product QKL, which began in July 2012, has been resolved as new facilities started to ramp up in late 1Q13.
2013 guidance in detail
Management expects more than 20% volume growth in 2013. GM may continue to be slightly eroded by the ramp-up of OTC products with lower margins. However, sales and marketing expense is likely to stay at the 20% level. The upside resides in M&A, as well as EDL opportunities for HXZQ capsule. Risks include government grants due to their unpredictability.
Increasing price target from HKD15.5 to HKD17.3; risks
Our price target is based on 15.7x 2013E EPS of HKD1.1, based on a PEG of 0.8 and CAGR for 2013-15 of 20%. We maintain our PEG of 0.8 to reflect the risks in injectable TCM. At 9.6x 2013E EPS with 19% expected growth in 2014 (ex-cash), we see a compelling risk-reward profile. We highlight that net cash of RMB2.2bn represents HKD3.31/share. We also anticipate a gradual start to an upward earnings revision cycle. Key risks include further price erosion, higher-than-expected expenses in sales and marketing, and adverse events associated with injectable TCM.