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 12.8x 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 continues to drag growth, uncertaintyremains during 2013 Sales increased by 5.8%, among which sales of injection,soft capsule and granule products increased by 14.0%, 6.7% and ‐2.7%respectively. Slow growth is primarily due to the ongoing distribution channeladjustment which results in decrease of number of distributors. The progressseems to be slower than expected, uncertainty of sales growth remains during2013.
Slow sales growth of OTC products is confirmed Sales decrease of granuleproducts confirms our cautious view on growth of OTC products since OTCproducts accounts for >50% of granule products. As sales growth ofprescription drugs slows down, the company has decided to more aggressivelypromote its OTC products (~20% of total sales in 2012) to maintain its growth.The company plans to increase its sales of OTC products through selling in morepharmacy stores, but its negotiation with large chain pharmacy stores appearsto 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.