Sihuan Pharmaceutical (460) reported better-than-expected earnings– Maintain BUY
Sihuan Pharmaceutical (460, $9.50) reported net profit of RMB1,303mn in 2013, up 44.1% yoy. Comment: The result
beat market expectation and analysts are likely to upgrade earnings forecasts. Revenue surged by 55.6% yoy to
RMB4,732mn in 2013, thanks to sales improvement in company’s key products Kelinao (up 71.7% yoy) and Oudimei
(up 93.1% yoy) and rapid growth of its new products which include Yuanzhijiu (up 19.7% yoy), Yeduojia (up 2.2x
yoy), Yimaining (up 54.9% yoy). We are impressed that products launched after the company’s IPO in 2010
accounted for 54% of total revenue. We take this as a solid evidence of the company’s sustainability development
since these new products are still at their early stage of life cycle. Gross profit surged by 61.6% to RMB3,699mn,
with gross profit margin expanded by 3.0 ppt to 78.2% as higher-margin products rolled out. Operating expenses
significantly expanded by 74.8% to RMB2,656mn, due to higher distribution costs on marketing events and academic
promotions. The surge on distribution costs reflected continuous optimization of distribution network, in our view.
The investment in distribution network will pay off if it leads to rapid sales growth. Management expects more
provincial drug tenders will be held this year which provides opportunities to Oudimei, Yeduojia, Yuanzhijiu to
penetrate into new markets. These products currently access less than half of the provinces in China. As we expect
8 provinces will commence drug tenders this year, we expect these products to post strong growth in 2014. All in,
management expects revenue growth will beat industry average of 18%. In anticipation of strong growth from Oudimei, Yeduojia, Yuanzhijiu, we expect the company to deliver revenue growth of 23% to RMB59bn in 2014. Net
profit will grow 20% to RMB1.5bn (EPS: RMB0.30) in 2014, implying EPS CAGR of 31% from 2012 to 2014.
We maintain our BUY recommendation on Sihuan and raise 6-month target price from $8.80 to $11.25. Our target
price is based on 30x 2014 earnings. We adopt a growth oriented valuation benchmark as we believe investors have
classified Sihuan Pharmaceutical as a growth stock. Analysts’ consensus target price is $9.14. Notably, in view of
the growing pharmaceutical industry in China and the intensified industry consolidation, the Board slashed final cash
dividend by 64% to RMB2.1 cents per share but proposed a 1-for-1 bonus issue.
As of 31 December 2013, the counter had net cash of RMB1.3bn or RMB0.25 per share. Considering its strong
financial position and track record of expanding business by M&A, the company is likely to acquire some new
products this year. Announcements on M&A tend to be positive to the counter’s share price performance as
expansions of product portfolio and cash deployment will likely outweigh the impact of deteriorating financial
standings, in our view, and this will put consensus estimates on upside risk as growth accelerates. Major downside
risk comes from the anti-bribery campaign in China. However, the risk is limited to Sihuan as the company
outsources almost all sales and marketing functions to ~3,000 independent contract-sales agents. The company
does not sell products directly to doctors or hospitals, which are the investigation focus, so Sihuan Pharmaceutical is
unlikely to be the target of the campaign.