Revenue/recurring net profit were up 19%/25% yoy
While Matrifill records strong growth from effective marketing,orthopaedics products suffer from price cuts
Maintain Buy rating but TP lowered to HKD50 from HKD57
Orthopaedics under larger-than-expected pressure. We hosted an NDR onThursday after Haohai’s interim results release. Revenues/net profit were up19.1%/7.5% in 1H16. Excluding exchange gains in 2015, recurring net profit rose25.1%. Orthopaedics HA injections, accounting for 26% of total revenues in 1H16,saw yoy contraction of 15%, mainly due to the price cut in drug tenders with flatvolume growth. ASP has dropped from RMB120-130/2ml in 2014 to slightly overRMB100/2ml on average in recent tenders. Haohai gave up certain regions wheresecond-round price negotiations pushed the price down further to RMB70+. The twoinvoicesystem has also impacted ortho HA injections as sales agents turned morecautious on replenishing their stocks. We expect Chitosan injections, estimated toaccount for 30% of Haohai’s orthopaedics business, to be the main driver of the orthobusiness going forward. As of 1H16 Beijing and Shanghai accounted for 85% ofChitosan injection sales, while Haohai also saw progress in Liaoning, Heilongjiang,etc. Management will expand Chitosan to many more provinces.
Matrifill recorded strong growth. Matrifill sales, contributing 21% of revenues, rose149% yoy to RMB80m in 1H16. The improvement is consistent with what weobserved in our latest plastic surgery hospital survey where Haohai’srecommendation rate jumped from 24% in Feb to 40% in Jul. Strong growthmomentum should last through 2016e given Matrifill’s: 1) low base: it only entered themarket in 2014 and is still in rapid ramp-up mode; 2) cost advantage: its wholesaleprice is c.RMB400/ml, comparable with Korean brand YVOIRE. Matrifill haspenetrated c800 hospitals with private ones being the main revenue contributor.
Management stated that it will focus on the leading chain plastic surgery hospitalsand sees rising sales per hospital as a priority. Haohai’s long-acting model, Janlane,is in the final stage of CFDA application and is expected to get approval in 2H16. Weexpect Haohai’s dermal filler business to grow 90% yoy in 2016e.
Maintain Buy but lower TP. We lower our 2016/17e EPS by 5%/7% due to the largerthan-expected pressure on ortho HA injections. We introduce our 2018e forecasts, witha 2016-18e net profit CAGR of 15%. Our new TP of HKD50 is based on 22x 2016e PE(previously 24x). We lower our target multiple due to stagnant ortho HA injections. Thenew multiple is comparable to Bloomage’s (963 HK, HKD12.28, Buy) TP impliedvaluation multiple, as we expect Haohai to perform strongly in the cosmetic surgerymarket. Catalyst: potential M&A in 2H16 in ophthalmology area to be funded byHaohai’s IPO proceeds. Downside risks include higher-than-expected price cuts forortho HA injections and competition from new entrants in the cosmetic surgery space.