We stay constructive as growth may exceed street expectations
We remain constructive on China Shineway, and remind investors that recovery is clearly on track for 85% of the business, with OTC representing only 15% of the business. New products contributed approximately 4% to total revenue, with much better margins and growth as Shineway plans to march into tier 1 hospitals with significantly more resources behind these products. However, we acknowledge that with data indicating limited ROI after 2 years of restructuring OTC channel, some investors seem to have lost patience with this name.
2H13 outlook and 2014
Management walked through each line of the business during NDR, indicating 1) OTC growth is expected to be flat YoY for full year, as sales would intensify activities in 2H13 to recover growth; 2) injectables are likely to continue its growth momentum; 3) newly launched products are likely to contribute to a larger percentage of the revenue in 2H13; 4) gross margin would be impacted as OTC growth recovers, however increasing contribution from new products may help as well; 5) management plans to control distribution costs within 20% for full year, and administrative costs in 11-12%. As such, we believe double-digit profit growth for full year is highly likely. For 2014, management expects slight pricing pressure on ex-manufacturing prices of Shenmai/Shuxueling, which contribute to approximately 20-25% of the sales. However, sales through the EDL channel represent only 20% of the Rx (prescription) sales. We remind investors that only EDL channel would be impacted by price cut, and Rx represents about 80% of the sales for Shineway.
Strategic priorities and initiatives
Management indicated that 1) injectables remain the largest profit driver, and the company plans to penetrate all 60,000 township/county level clinics in the next 3 years, vs. 20,000 already penetrated; 2) OTC restructuring has been largely completed and the company expects growth to recover in 2H13, however continuous investment is likely to ensue as Shineway plans to build a TCM nutrition platform in the long term; the company plans to target 8,000 outlets in 50 cities; 3) the company plans to penetrate into tier 1 hospitals with products with higher margins, and also plans to increase M&A activities to acquire more products; 4) the company officially started incentive program to grant options to senior management, key research personnel and sales team, with 20m shares in total for this time. The total was budgeted at 10% of the outstanding number of shares of 827m.