Earnings missedIn 1H15, Kaibao’s revenue rose 10.0% YoY to Rmb883mn, while net profit attributable to shareholders climbed 3.2%YoY to Rmb189mn or Rmb0.23/share, slightly lower than market consensus.

Trends to watchSlower growth of Tanreqing. In 1H15, revenue from Tanreqing injections grew 0.18% YoY to ~Rmb800mn, mainlydue to the impact from sector policies, such as fee controls on the medical insurance. Rolled out in January, Tanreqingcapsules have been included in the supplement list of Guangxi’s local medical insurance and are now under promotion.

Acquisition of Xinyi Pharmaceutical completed. Xinyi Pharmaceutical has seven forms of dosage and 148products, including Tiopronin Enteric-coated tablets, Tiopronin for injections and Qishen Capsules. The acquisition isexpected to diversify Kaibao’s product mix and resolve intra-group competition, creating visible synergies. Thewholly-owned subsidiary, Kaibao Equity Investment Management, will seek new growth drivers with external expansion.

Steady progress in R&D. The company is applying for approval so that the 5ml Tanreqing injection can be put toproduction, while the Dinggui Youruan Capsule, Tanreqing Oral Liquid, Shufeng Zhitong Capsule and Huadan AnshenHeji are now under Phase III clinical research. The new TCM, Youxinding Capsule, a treatment for depression, is alsounder Phase II clinical research.

Earnings revisionsConsidering the slowdown in sector growth, we cut our 2015/16e EPS forecast by 20%/16%/22% fromRmb0.58/0.60/0.82 to Rmb0.46/0.58/0.64, implying YoY growth of 10%/26%/11%.Valuation and recommendationOur 2015~17e EPS forecast implies 36x/29x/26x P/E. Considering the strong expectations for M&A and a high margin ofsafety, we maintain our BUY rating. Given the slowdown in sector growth, we cut our TP by 23%, from Rmb26to Rmb20, implying 43x 2015e P/E.

RisksDecline in drug prices; price hikes in TCM materials; uncertainties in R&D projects, new drug approvals and M&A;adverse effects of TCM injections.