Anticipating a better 2H13
Shineway reported 1H13 revenue/EPS of RMB1.06bn/RMB0.47 vs. DBe of RMB1.1bn/RMB0.43. These represent 5.7%/8.6% YoY growth, vs. 7.4%/-14% YoY growth in 2012, strongly suggesting th at the recovery is well on track. The beat on bottom line was largely due to reduced spending on advertisement.
Management continues to anticipate profit growth for 2013 but declined to quantify. We anticipate double digit profit growth for 2013. Maintain Buy Volume recovery on track; anticipate s light pricing risk on Shenmai/Shuxueling Management indicated that 1) volume growth for injectables remains healthy; and 2) granules were impacted by OTC channel restructuring; however, most elements are internal factors which ha ve been largely resolved in 1H13. Additionally, the company expects slight pricing risks for two products that exceed RMB100m sales – Shenmai and Shuxueling – without quantifying the magnitude of anticipated price erosion from incoming EDL/RDL tender. Management has no plans to adjust ex-manufacturing prices for major products.
Margin improvement likely to continue
GM and OPM were 66.7% and 39.5% in 1H13, vs. 65.1% and 37.5% in 1H12, respectively. Management ascribed GM improvement to lack of pricing pressure and increasing contribution from injectables, which have higher GMs. For expenses, the company plans to control distribution costs within 20% and SG&A at 11% for full year. As such, we believe margin expansion is likely to continue.
Fine-tuning price target to HK D17.2 from HKD17.5; risks
Our price target is based on 11x 2014E EPS of HKD1.24, with HKD 3.51 cash per share. The stock is trading at an effective multiple of 10.7X 2013E DBe EPS, or 8.2X ex-cash, with an expe cted EPS growth of 14% in 2013. We believe the stock is undervalued. Key ri sks include larger-than-expected price erosion, slower-than-expected OTC restructuring and adverse events related to TCM injectables.