Solid growth from HA dermal filler MatrifillHaohai reported 1H16 revenue and net profit of RMB373mn andRMB151mn, representing 45% and 48% of our full-year FY16Eestimates respectively. Revenue was up 19.1% YoY to RMB373mn,of which sales of HA dermal filler Matrifill was up 149% YoY toRMB80mn. GPM was down 1.7ppt YoY to 83.3%, mainly due tolower margins in HA-based orthopaedic products. Excludingexchange gains in relation to IPO proceeds in 1H15, net profit wasup 25% YoY to RMB151mn.
　　Orthopaedics sales dragged by HA injectionSales of HA-based injection was down 15% YoY to RMB98mn, dueto lower pricing amid provincial tenders. Management said pricecuts in most provinces were c.10% （while Zhejiang and Ningxia sawthe most severe price cuts with c.25-30%）。 On a positive note, salesgrowth of its exclusive chitosan-based injection Chitogel remainedrobust at 37.5% YoY （to RMB37mn） in 1H16, as the product wassuccessfully promoted in six more provinces including Guangdong,Liaoning, Shandong, Jiangsu, Hubei and Heilongjiang.
　　M&A strategy and pipeline updates
　　In addition to the acquisition of 38% equity stake of Henan Universeat RMB10.9mn in Sep 2015, the company continues to seek M&Atargets to further venturing into the intraocular lens （IOL） market.
　　The IOL products in the Chinese market are currently dominated byimported products, where we believe it implies a large marketpotential for domestic manufacturers such as Haohai. As of Jun2016, Haohai had 17 product candidates in the pipeline, of whichhigh concentration ophthalmic viscoelastic devices （OVD） and 2ndgeneration HA dermal filler are expected to be launched in Sep 2016and 4Q16/1Q17 respectively.
　　Estimates and TP change; Maintain Buy
　　We cut FY16/17/18E sales by 7%/9%/10% mainly due to lowersales in HA-based orthopaedics products amid provincial tenders.
　　GPM was adjusted downward by 0.7ppt/0.6ppt/0.4ppt inFY16/17/18E due to lower margins in HA-based orthopaedicsproducts while interest incomes were adjusted upward to reflect therecent trend. As a result, FY16/17/18E EPS were lowered by6%/8%/10%, with our DCF-based TP reduced from HK$57.30 toHK$50.00, implying FY16/17E P/E of 22x/19x. We believe Haohai isattractively valued at 16x FY16E P/E or 10x ex-cash P/E, given itsleadership position in the PRC biomedical material market andpotential M&A opportunities.