In-line 1H17 results
Haohai reported 1H17 sales and net profit of RMB605mn (+62.3%YoY) and RMB176mn (+16.0%), representing 45% and 50% of ourrespective full-year estimates. Excluding acquired intraocular lens(IOL) business, 1H17 sales was up 14.5% YoY to RMB427mn,driven by HA dermal fillers (+33.9% YoY to RMB107mn). Grossprofit margin was down 4.3ppt YoY to 79.0%, due to IOL productswhich had a lower GPM of 60% vs. 87% for ex-IOL business. SG&Aratio was up 4.5ppt YoY (or -0.5ppt HoH) to 46.1%, mainly due tohigher expenses incurred by IOL business and higher direct salesratio.
Emerging franchise in medical aesthetics
Sales of HA dermal filler products, namely “Matrifill” and “Janlane”,continued to grow robustly at 33.9% YoY to RMB107mn in 1H17.Launched in Feb 2017, Janlane is the second brand of Haohai’s HAdermal filler. Compared to its first HA product Matrifill, Janlane ispositioned at a higher price with filling function, which iscomplementary to Matrifill’s shaping function. Janlane is currentlysold by direct sales, with sales amounting to c.RMB10mn in 1H17.Management said it stringently control the terminal price of Janlaneabove RMB3,800+ to protect margins for both Haohai andend-users including hospitals and medical institution. Moreover, thecompany’s 3rd generation HA dermal filler “QST gel”, currently inclinical trial phase, is expected to launch in 2019.
IOL business to ramp up in 2H17
The company expects a fast ramp up of IOL business in 2H17, giveni) volume of cataract surgeries performed in China is fast growing ata yearly rate of 30%+, ii) production capacity expansion in HenanUniverse, and iii) consolidation of Contamac. The company willlaunch non-spherical foldable IOL and IOL injector in 2H17 and2018, respectively. On M&A strategy in the ophthalmology space,the company will continue to seek opportunities in medicalequipment, consumables, eye drops, and ophthalmic drugs.
Valuation and risks
The stock is currently trading at 15.2x FY17E P/E or 11x ex-cash,against 17%/23% earnings growth in FY17/18E. We remain ourDCF-based target price of HK$46.80, implying FY17/18E P/E of19x/15x or 10% premium to peers’ average, which we believe isjustified given its solid franchises in multiple niche areas in the PRCbiomedical device and consumable space, spanning fromorthopaedics to ophthalmology to medical aesthetics. Catalysts arei) M&A opportunities and ii) new product approvals/ launches. Risksinclude severe price cuts due to provincial tenders, integration risk inIOL business, and negative impacts due to two-invoice system.