Turn-around of a bellwether; new strategy, new pipeline and more acquisitions
Shineway generated RMB1.1bn revenue and EPS of RMB0.36 in 2H13 vs. consensus of RMB1.2bn and RMB0.38, representing flat and 2% YoY growth, respectively. Management guided towards double-digit growth for revenue and profit in 2014 with a new strategy. The company plans to strengthen its core platform with a relatively quality pipeline including branded generics such as Viread, while marching into the healthcare service and retail sectors. The company is ready to close two acquisitions with a RMB500-600m price tag. We reiterate Shineway as one of our top picks and raise our TP to HKD20.
Multiple catalysts incoming
We expect the following catalysts to support share appreciation in the near term: 1) 1Q14 revenue release in April – a quite satisfactory demonstration of a successful sales reorganization, according to the chairman; 2) closing of two accretive acquisitions with a c.10x P/E multiple in 2H14, which we estimate could bring c.RMB55-65m annualized net profit in 2014. Management also guided that these acquisitions have exclusive drugs that are expected to enjoy rapid growth; 3) pipeline progress and CFDA filings for approval; 4) an announcement of the building of a new hospital through a JV with a large local hospital; and 5) the 1H14 result release. Given these, we think the 2H13 results, while falling slightly short of Street estimates, might not be relevant.
Increasing price target to HKD20 from HKD17.6
We base our price target on 13.5x 2014E EPS of HKD1.22, with HKD3.55 cash per share. We derive the 13.5x multiple by applying the same PEG of 0.9 to a 2014-2016E EPS CAGR of 15%, on HKD basis. We retain the PEG discount based on the nature of the TCM injection and its long-term growth prospects. However we do not include any acquisition-related upside, which we estimate at an RBM55m run-rate in 2014. With the shares trading at 6.9x 14E EPS with multiple catalysts that were not included in Street expectations, we continue to believe this name has the most attractive risk/reward profile within our coverage universe. Key downside risks include greater-than-expected pricing pressure, a slower-than-expected ramp-up of new products as well as unexpected liability for TCM injection.