2Q14 decelerated; guidance lowered. Still Buy on valuation/growth
Shineway delivered RMB1.099bn/RMB0.49 in revenue/EPS for 1H14, lower than our estimate of RMB1.196bn/RMB0.51. These represent 3.8% and 5.1% YoY growth, respectively. Additionally, 2Q revenue growth of 2.1% decline is lower than 10.7% growth for 1Q14, suggesting significant deceleration. Management attributed the slowdown to delays in drug tenders for new products, impact of the anti-bribery campaign, as well as inventory de-stocking for three EDL drugs as distributors expect price cuts. For the full year, management now expects single-digit vs. double-digit growth before.
Growth turnaround might be time consuming
We believe several elements are likely to support growth acceleration: 1) M&A– management now expects a few deals to be completed in 2H14 although the timeline and the size are uncertain. Additionally, the targets include both research projects and drug manufacturers; 2) RDL tender for hospital drugs –the newly launched drugs that are targeting the hospital sector would not start to ramp up until tender starts; 3) Shineway’s newly hired head of sales might need a few months to ramp up; 4) inventory re-stocking will not occur until EDL tender completes, which could lead to slight price erosion.
Margin expansion driven by cost savings
GM and OPM are 65.9%/39.1% in 1H14, vs. 66.7%/39.5% in 1H13. While cost control was effective in 1Q14, we think this also attributed to growth anemia on the top line. That said, if we were to exclude government grants and expenses related to stock options, adjusted EBIT grew 12%. Also, the company expects another 25m share related expenses in 2H14 vs. 19m in 1H14.
Lowering target price to HKD18 from HKD20, risks
Our target price is based on 11x 2015E EPS of HKD1.29, with HKD3.97 cash per share. We believe 11x is justified while peers are trading at 22x 2015E EPS with 23.4% growth, vs. 14% for Shineway. While the turnaround appears to be delayed, we still like this name due to its inexpensive valuation and potential for growth acceleration after aforementioned catalysts materialize. Downside risks include larger-than-expected pricing cuts, slower-than-expected ramp-up of new products as well as unexpected liability for TCM injection.