CR Sanjiu and Dong-E-E-Jiao reported strong preliminary FY22E results, reflecting strong momentum of its manufacturing section
But we think the latest Omicron wave in China might negatively affect its distribution segment in 4Q22E
We fine-tuned SOTP TP to HKD8.8. Valuation still attractive with M&A opportunities. Maintain BUY
　　Strong manufacturing momentum continued
　　Co.’s two major manufacturing subsidiaries (CR Sanjiu and Dong-E-E- Jiao) reported strong preliminary unaudited results. CR Sanjiu (000999 CH) FY22E adj. core profit is expected to be in the range of RMB2,150- 2,320mn (+16-25% yoy vs. 1,853mn in FY21). We think this reflected its strong organic growth momentum continued in 4Q22E (we reckon its adj. core profit nearly doubled to ~RMB460mn in 4Q22E). In addition, we expect the KPC pharmaceutical acquisition (CR Sanjiu acquired 28% of KPC stake as the largest shareholder) could provide inorganic growth (~10% growth in our view) for CR Sanjiu into FY23E. DEEJ (000423 CH) FY22E adj. core profit is expected to be in the range of RMB760-810mn (+73-84% yoy vs. 440mn in FY21). We believe the strong growth reflected channel inventory destocking might be over as well as its efforts of multi-dimensional tactics and an improved marketing strategy.
　　Distribution segment might be affected by Omicron wave
　　Due to hospital services in China partly disrupted by Omicron wave in 4Q22, we expect certain level of challenges weighed on Co.’s distribution segment during the periods. Meanwhile, we reckon this could also trigger some worries about longer account receivable days and potential provision for account receivables. We thus trimmed segment margin of distribution segment by 0.4ppt to 3.4% in FY22E to factor in the margin pressures in the near term.
　　Valuation remains attractive, maintain BUY
　　We cut FY22E/23E earnings estimates by 5%/2% to reflect Omicron disruption on distribution segment in 4Q22 partly offset by better-than- expected manufacturing segment. SOTP TP is revised up to HKD8.8 from HKD8.5. Co. now trades at ~8x 23E PER, near the lowest quantile in its historical PER band. We believe Co. continues to be well-positioned to leverage its SOE strength to pursue more M&A and BD opportunities.
　　Investment risks: lower-than-expected sales, higher-than-expected account receivable risk, etc.