On 22 Aug, Livzon announced its 1H17 core profit at RMB455m (+25%y-o-y), 4% missed ours and consensus on bigger profit from nonwhollyowned subsidiaries. We expect its slacked sales on hormone torejuvenate again from 2H17 with 22%/20% y-o-y growth in FY17F-18F.
　　Maintain BUY with dipped TP at HKD51.90 on smaller gross marginand bigger minority interest.
　　1H17 Missed on more non-wholly owned subsidiaries’ profit.
　　On 22 Aug 17, Livzon reported its net profit at RMB504m, up 23% y-o-y. Itsunderlying earnings of RMB455m, up 25% y-o-y, 4% below our and consensusforecast. The main reason was bigger profit from non-wholly owned subsidiariessuch as Shanghai Livzon with 1H17 earnings to jump 52% y-o-y. Well-performedsales of digestive system drugs and bulk medicine such as Acarbose (anti-diabetic)offset the unsatisfactory sales from hormone on high base and Mouse NerveGrowth Factor (丽康乐) (NGF). On its expertise in hormone area, we expect itshormone sales to keep at 22% y-o-y in 2017, making up 16% of total revenue (FY16:
　　15%). Slower sales from NGF was due to withdrawal of tenders in Guangdong andFujian on potential reduction of drug reimbursement amount. On the back of inline1H17 total revenue, we edge up our FY17F-19F revenue 1% each year onhigher digestive system drug and bulk medicine sales.
　　Trimming FY17F-19F earnings 2%-3%.
　　However, its 1H17 gross margin (GPM) of 64.8% fell short of our expected 65.5%,on lower selling prices to certain distributors. As such, we trim our GPM forecast to64.6%/ 64.8%/64.9% in FY17F-19F from over 65%-66% level in FY17F-19F. In lightof more profit from non-wholly owned subsidiaries with higher minority interest(MI), we tune up MI leading to our net profit down 2%-3% in FY17F-19F. Moreover,Livzon also issued the preliminary estimate for 3Q17F reported earnings atRMB3,725m to RMB3,766m, and we expect this to be RMB3,730m in 3Q17 withland disposal gain at RMB3.5bn. To fuel its future hormone segment growth, its (1)recombinant human chorionic gonadotropin (rhCG) for injection is under phase IIItrial; and (2) Leuprorelin Acetate for injection is in application for preclinical trialwith Triptorelin Acetate Microspheres project awaiting for clinical trial approval.
　　SOTP-TP dips to HKD51.90 (from HKD52.50). Maintain BUY.
　　Our new SOTP-TP of HKD51.90 reflects 22.1x FY18F P/E (from 21.9x) and 10.8xEV/EBITDA, at par to sector’s target EV/EBITDA median. We deem the stock’spremium P/E valuation (vs sector target median at 17.0x) is justified on its being (1)specialty drug-maker; (2) leader of China’s hormone drugs; and (3) brandedsupplier of various bulk medicines (eg Acarbose). While its R&D valuation isestimated to be HKD8.4bn (or HKD15.38/s), not included in our TP, implying 29.6%of our current valuation.