Haohai's strategic position in ophthalmology is overlooked; affirm Buy
With a series of acquisitions in the intraocular lens (IOL) field, Shanghai HaohaiBiological (HH) has established a strong foothold in the promising IOL market, largelydominated by imported products, with an estimated acquired volume share of ~40%(Nimo acquisition; Universe acquisition). It is negotiating with other potential targetsglobally, as per management. The settled acquisitions could bring ~Rmb400/40m inincremental revenue/net profit in 2017E. We are revising our financial forecastsaccordingly. As it is trading at 14x 2017E PE, with ~20% visibleearnings growth for at least the next 2 years, we think the stock is attractively valued.
IOL is the key missing piece in its ophthalmology business
We think HH has a strong foothold in the IOL market, with a material market presenceand a comprehensive product offering, ranging from low-end PMMA IOLs to foldablehydrophilic/hydrophobic IOLs, targeted at various patient groups. The acquired IOL willcomplement HH's current portfolio of ophthalmological viscoelastic devices (OVDs) andeye drops to provide a full array of products for cataract surgery. HH plans to streamlinea focused sales team for the new ophthalmology business and has sourced an expert inthe field as the sector head. As it did in its other acquisitions, we expect HH to lean onthe acquired business to lead a new round of rapid growth in the field.
High-teens growth attainable for its existing business
We expect its existing business to sustain high-teens growth in the next 2 years due to:1) robust growth at its dermal filler products; and 2) high single-digit growth of theOIVS (orthopaedic intra-articular viscosupplement) segment, including HA (hyaluronate)and chitosan OIVS, after considering a 5-10% price cut impact on established HA OVIS.In the short run, since the remaining provincial tenders are unlikely to generate lowprices, the impact of a price cut is more visible now, in our view. Over the long term,low penetration and its recent addition into the standard clinical pathway for arthritistreatment could sustain the long-term growth prospects of OIVS.
Valuation: Raising DCF-based price target to HK$55.00, implying 20x 2017E PE
We raise our DCF-based (WACC 10.4%) PT 6.8% to HK$55.00, implying 20.4x 2017EPE or PEG of 1.0x. Our PT change is largely driven by: 1) its acquisitions driving earningshigher by around 6.8%8.1% in 2017/18E, as well as in later years; 2) increase inWACC from 10.1% to 10.4% due to an higher risk free rate; and 3) RMB depreciationof around 4%.