Consun segment achieved steady growth
In 1H18, Consun Pharma Group （CPG） achieved revenue of RMB869mn, grew 13.0% YoY; gross profit margin was 75.0%, a slightdecrease of 0.7 ppt; profit attributable to shareholders grew 18.5%YoY to RMB 219mn. Consun Pharm segment achieved revenue ofRMB 589mn, an increase of 16.5% YoY, accounting for 65.7% of thegroup's total revenue; gross profit margin decreased 0.4 ppt YoY to79.5%.
The main product uremic clearance granules （UCG） achievedrevenue of RMB 444mn and accounted for 51.1% of the group's totalrevenue in 1H18, an increase of 15.7% YoY vs 12.4% CAGR in thepast three years. Management said that the UCG will be extendedfrom phase four and five patients to phase two and three patients. Inaddition, the current coverage of UCG in secondary and tertiaryhospitals is 30% and 50% respectively, and there is room forimprovement. In terms of women and children products, the incomein 1H18 was RMB 6.79mn, an increase of 15.1% YoY （vs 27.4%decline in FY17）。 The group's Iron Dextran Oral Solution increasedthe adult dosage specification from 5ml to 10ml, which is focus ongynecology and is expected to maintain steady growth in 2H18.
Yulin segment expected to keep increasingConsun is holding a 72.6% stake in Yulin. Yulin Pharm segmentcontributed RMB 280mn in 1H18, an increase of 6.1% YoY,accounting for 32.2% of CPG's total revenue （vs RMB 264mn in1H17, accounting for 34.3% of total revenue）。 The slowdown wasmainly affected by the sewage treatment problem in May and ledgross profit margin decreased 2.0 ppt YoY to 65.6%. The saleslayout of Yulin products has expanded from 6 provinces to 31provinces and cities, and the sales team has increased to more than500 persons in 1H18. The original price of main product 12ml ZhengGu Shui is RMB 2.0-5.0, management said that the price willgradually increase to RMB 8.0 in the next 3-5 years. We expectYulin's income to achieve RMB 364.1mn in 2H18, which implies8.4% growth in 2H18 YoY.
Making steady progress in R&D
CPG's R&D costs were RMB 10.2mn in 1H18, accounting for 1.2%of total revenue, which is stable compared to 1H17. The kidneydisease drug Lanthanum carbonate chewable tablet is expected tobe in market by 2020, and Astragali power pellet is preparing for the2nd phase of CFDA clinical trial and preparing to apply for the 2ndphase of the FDA clinical trial, which may become one of keyproducts in medium term; the ultrasound microbubble medicalimaging contrast agent has reported for clinical use in 2019 and tobe listed in 2021; Secondary development of Zheng Gu Shui isplanned for clinical use in 2020 and will be listed in 2024, which webelieve to enhance its market share.
Attractive valuation, we initiate BUY with TP HK$9.60Without considering the contribution of new products that would belisted, we expect CPG's sales and EPS to grow 15.0%/14.9% CAGRin FY17-FY19E, driven by main products growth, while having stableGM and expense ratio. The group’s cash flow is sufficient （1H18operating cash flow: RMB 393mn, an increase of 427.8% YoY）， weexpect the group may seek for M&A opportunities in future.
Consun is currently trading at 9.6x/8.4x FY18E/FY19E PE, compared withindustry average 14.6x/13.6x FY18E/FY19E PE. We initiate CPG at BUY withTP HK$9.60 based on the DCF model, which translates to 16.1x/14.1xFY18E/FY19E PE.