Results in line with our expectation, but lower than market expectationSales increased by 7.4%, but net profit attributable to shareholders decreasedby 14.3% mainly due to significant increase of SG&A expense ratio as a result ofdistribution channel adjustment in 2012. GPM slightly decreased to 65.3%(2011: 65.6%), but SG&A expense ratio significantly increased to 34.9% (2011:27.3%). OPM decreased to 37.7% (2011: 47.8%) and NPM decreased to 30.4%(2011: 38.1%). The board proposed a final dividend of RMB0.12 per share andspecial dividend of RMB0.09 per share, total dividends reached RMB0.32 pershare for 2012, representing payout ratio of 41%.
TP and valuation We forecast 2013‐15 EPS will reach RMB0.92/1.05/1.14. Wemaintain TP of HK$9.86. Current valuation of 12.3x 13 P/E is higher thanhistorical average of 10x and is not attractive considering our 13‐15 NP CAGRforecast of 11.4%. Sales growth is likely to be impacted by the ongoingdistribution channel adjustment in 2013, we continue to maintainUnderperform.
Key assumptions SG&A expense ratios are 32%/30%/30% during 2013‐15respectively.
How we differ from consensus
Distribution channel adjustment resulted in slow growth, uncertaintyremains for 2013 Sales growth of injections, soft capsules and granulesproducts reached 8.4%, 2.5% and 7.8% YoY respectively. Slow growth isprimarily due to 1. ongoing distribution channel adjustment which results indecrease of number of distributors; 2. toxic capsule incident which hasimpacted sales of soft capsules products; 3. 25% ASP cut of major productQingkailing injections (~22% of total sales in 2012) in 4Q11. The companypreviously expects to complete the distribution channel adjustment by the endof 2012, but now it seems this goal hasn’t been accomplished as expected, weexpect the adjustment to continue in 2013, possibly impacting sales growth.
Sales growth of OTC products may be slower than expected As sales growthof prescription drugs slows down, the company has decided to moreaggressively promote its OTC products (~20% of total sales in 2012) tomaintain its growth. The company plans to increase its sales of OTC productsthrough selling in more pharmacy stores, but its negotiation with large chainpharmacy stores appears to be slower than expected.
Catalysts 1. Tendering prices of Qingkailing and Shen Mai injections continue todrop in 2013; 2. Negotiation with large chain pharmacy stores encountersdifficulty; 3. Safety issues of TCM injections; 4. Government restricts advertisingof OTC products.
Risks. 1. The progress of distribution channel adjustment faster than expected;2. Qingkailing and Shenmai injections are included into EDL Unified Pricing List.