1H16 results in-line, with improved SG&A ratio
LifeTech’s 1H16 net profit was RMB52mn (vs. 1H15 loss ofRMB202mn), whereas recurring net profit (excluding fair value andforeign exchange gain of convertible notes) was up 12.2% YoY toRMB39mn. Revenue was up 4.8% YoY to RMB156mn in 1H16.Peripheral vascular diseases (PVD) and congenital heart diseases(CHD) sales were +26% and -24% YoY, beating and missing marketexpectation respectively. GPM was down 3.4ppt YoY to 79.3%.SG&A ratio improved by 3.2ppt to 32.4%, mainly due to lowerdistribution expenses.
Strong PVD sales; CHD business remained weak
Sales of PVD business (70% of total sales) in 1H16 was up 26%YoY to RMB109mn, as sales growth of key products graft stent andvena cava filters were both up 20%+ YoY. Sales of CHD businesswas down 24% YoY to RMB47mn, primarily due to 1) domesticsales dragged by c.10%-20% ASP drops in some provinces amidtender impact and 2) weak overseas sales which mainly affected its3rd-generation occluder CeraFlex. The company said it will continueto grow the domestic market through product upgrade, i.e. using its2nd-generation occluder Cera to replace 1st-generation occluderHeartR, which should protect pricing and margins.
HeartToneTM pacemaker obtained “green channel” status
LifeTech continues to show strong pipeline progress. On 22 August,the company announced that its HeartToneTM implantablepacemaker was approved as an innovative medical device (aka“green channel” status) by the CFDA. In addition, patent foramenovale (PFO) occluder and drug-eluting peripheral balloon catheter(DEB) were also granted with “green channel” status by the CFDA in1H16. Recall that the CFDA had approved a total of 67 products asinnovative medical devices since the implementation in 2014, andonly LifeTech and Microport (853 HK) have more than four of theirpipeline products receiving the status.
Estimates change; Raise TP to HK$1.80
We adjust FY16/17/18E sales by -10%/-2%/+1% due to lower CHDsales. SG&A ratio was adjusted downward by 1.3ppt/1.4ppt/1.5pptin FY16/17/18E to reflect lower distribution expenses while rentalincome and finance costs were adjusted upward accordingly toreflect the recent trend. As a result, FY16/17/18E EPS wereadjusted by -8%/+7%/+9%, with our DCF-based TP raised fromHK$1.60 to HK$1.80. Our TP implies 1.1x PEG (using 2-yearforward EPS CAGR) vs. peers’ average of 1.3x.