Recent stock weakness not justified; a buyin g opportunity
The street largely ascribed 18% stock depreciation this week to a news report that emerged on 4 June, citing that QKL sales in Hebei’s EDL channel declined 32% MoM. A detailed examination of the original data indicates that QKL recorded 86% YoY growth QTD 2Q13, 65% YoY growth for May 2013 and a 17% MoM decline in May 2013. We believe recent stock weakness represents an attractive buying opportunity.
Nothing is more convincing than high frequency data
The government procures 2ml and 10ml QKL from Shineway and its competitor, Yisheng, and 10ml QKL from Baiyunshan on a monthly basis. We summarize detailed QKL proc urement data from the source, hebyyjzcgw.cn, in this note. While this partic ular data point is likely to represent only 3-3.5% of total QKL sales, our quick maths conclud es that QKL sales have enjoyed rapid growth QTD 2Q13, largely due to the H7N5 flu pandemic that occurred in April.
On QKL national and Hebei sales: our estimate and management comments
We estimate QKL sales should have reached at least RMB750-800m at current run rate. Management indicated that sale s in Hebei represent at least 5% of the total while we believe sales in the EDL channel are more than 20% of Hebei’s sales. We also think QKL growth exceeded 30% in 2H12, hovered slightly below 25% in 1Q13 and is likely to be about 25-30% QTD 2Q13.
Compelling risk/reward profile; reiterat ing Buy and target price of HKD17.3
We assign two possibilities for the stock decline last week: misconstrued data from Hebei as mentioned and/or sellin g from large shareholders. Excluding cash of HKD3.38/share, the stock is only trading at 9.2x 2014E consensus EPS and 9.2x our EPS estimate, with 17% EPS and 19% EPS growth, respectively, by consensus and our estimates. Our pr ice target is based on 15.7X 2013 EPS of HKD 1.1, based on a PEG of 0.8 and CAGR for 2013-15 of 20%. We maintained our PEG of 0.8 to reflect the risks in injectable TCM. Key risks include adverse events, price cuts and delayed execution of OTC strategy.