1H11 revenue grew robustly by 21.3% yoy to RMB 2,817 mn, beating our previousestimates. But the gross margin decreased by 3.2pts to 24.8%, as a result ofcontinued increase in the price of raw material packages and labor costs. The decreasein gross margin was partially offset by decreased administrative expenses, and thus thenet margin decreased slightly by 0.9pts to 6.4%, resulting a benign growth of 6.4% yoyin net profit to RMB 180 mn in 1H11.
Pharmaceutical manufacturing business: segment revenue yoy growth of 20.0% beatour estimates, but the segment gross margin decreased by 5.7pts to 42.3%, worse thanour estimates. We think continuous segment revenue growth will be driven by richproduct portfolio and revise up our full year growth estimates to 17.8%, 16.9% and 17.4%in 2011-2013, respectively. Segment gross margin is revised down to to 41.8%, 40.9%and 40.4% in 2011-2013.
The Company?s pharmaceutical trading business and its pharmaceutical distribution JVwith Alliance Boots would only depend on organic growth, instead of opportunities ofM&A. Revenue of the Wanglaoji JV is recovering fast and would become the netprofit driver of Guangzhou Pharm, contributing to RMB87 mn, 114 mn and 146 mn tothe bottom line of Guangzhou Pharm in 2011-2013.
EPS estimates are revised up by 4.5%, 10.5% and 17.4% to RMB 0.370, 0.405 and0.443 in 2011-2013. Maintain TP of HK$7.50, representing 16.6x 2011PE, 15.2x2012PEand 13.9x2013PE. Upgrade our rating from “Reduce” to “Accumulate”.