Events:
The Company (a health care conglomerate offering scarce TCMdiagnosis/treatment service in its chained pharmacies) announced thatit signed strategic cooperation agreement with Shaoxing People’sSecond Hospital to 1) build the largest TCM clinic among generalhospitals in Zhejiang province, 2) supply premium prepared TCM piecesto the hospital, and 3) build the platform to train young TCM doctors. Inaddition, it also announced that its wholly funded subsidiary thatproduces prepared TCM pieces was issued the GMP certificate.
Comments:
The first step in cooperating with outside partners, joining handswith Shaoxing People’s No. 2 Hospital. A doctor can practice TCMindependently and well-known TCM doctors are very appealing topatients. Shaoxing People’s No. 2 Hospital boasts many well-knownTCM doctors. Via this strategic cooperation, the Company can use thisvaluable talent resource to train its own TCM doctors systematically,accelerating sustainable development of its TCM doctor resources. Inaddition, it can also accelerate development of its businesses such astumor and kidney disease treatment based on the hospital’s advantagesin these fields. Given the successful cooperation betweenGuoshengtang, the Guangdong based TCM clinic chain, andGuangzhou University of Chinese Medicine, we believe this move is thefirst step for the Company to cooperate with outside partners, theCompany will likely go deeper in such cooperation going ahead and thismodel of cooperation will likely to be replicated within Zhejiang province.
Synergies emerging gradually thanks to efforts in delving deeperalong the TCM value chain. With unrivalled product quality controltechnologies in Zhejiang province, the Company is well-recognized byShaoxing People’s No. 2 Hospital in its raw-material-picking, processingcraftsmanship, product quality for/of prepared TCM pieces. In addition,the Company’s status as the hospital’s suppliers will boost its preparedTMC pieces sales volume. As the GMP certification for the Company’sprepared TCM pieces has been completed, its capacity for this productwill be put into operation over time and this will likely boost gross marginof the prepared TCM pieces business (by ~10% on estimation). Thisbusiness helped the Company rake in sales of over Rmb100mn for2015 and will likely grow into a major profit growth driver in future.
Pharmaceutical manufacturing profit expected to turn aroundconsiderably during 1H2016. The Company’s pharmaceuticalmanufacturing business delivered poor profit during 1H2015 due to astring of factors (relocation of factory, production halt of oral soliddosage products due to GMP certification, huge environment protectioninput etc.). We expect its pharmaceutical manufacturing profit to turnaround considerably during 1H2016 given rise of API prices, completion of GMP certification for its oralsolid dosage production line, ramp-up in sales volume of major products.
Potential risks: disappointing progress of cooperation with hospitals, intermittent rise of API prices.
Reiterate our BUY rating. The Company (a health care conglomerate offering scarce TCMdiagnosis/treatment service in its chained pharmacies) is making its first step to cooperate with outsidepartners by joining hands with Shanxing People’s No.2 Hospital. This model of cooperation with hospitalswill likely be replicated at faster pace in Zhejiang province. Meanwhile, we expect its 2016 profit to growrapidly as its production capacity of oral solid dosage will be put in operation gradually as the GMPaccreditation for its production line has been completed. We reiterate our 2016/17/18E EPS estimates ofRmb0.21/0.27/0.34 for the Company, apply 63x 2017E PE to it given its profit elasticity, size of its marketcap and valuations of its comparables (equivalent to a TP of Rmb17.01), and reiterate our BUY rating.
