Results in line

Kaibao Pharmaceutical announced 1~3Q16 results: revenue wasRmb1.193bn, up 4.17% YoY; net profit attributable toshareholders was Rmb260mn, up 2.15% YoY, or Rmb0.31 pershare. The result is in line with our expectation.

Trends to watch

Earnings growth improved QoQ; Tanreqing resumedgrowth. In 3Q16, Kaibao recorded revenue of Rmb309mn, up17.42% YoY （+0.22% in 1H）， and net profit of Rmb68.48mn, up5.23% YoY （+1.10% in 1H）。

Product echelon has formed; revenue structureexpected to diversify. The company has several drugs inPhase-III and Phase-II clinical testing.

External expansion cont inues in cardio-cerebrovascular,anti-tumor areas. In recent years, the company has enterednew areas via external expansion. It has taken stakes in YizhongBiology to jointly develop injection drug Paclitaxel micelle and inGebaide Biology to introduce injection drug Dulanermin. Both areanti-cancer drugs with strong market potential. The companymay continue to conducting external expansion to deploy formajor products.

Earnings forecast

Maintain 2016/17e EPS at Rmb0.37/0.39, up 7.8%/6.8%YoY.

Valuation and recommendation

The stock is trading at 30x/29x 2016/17e P/E. Maintain BUY.Considering the improving earnings growth and productdiversification driven by external expansion, we lift TP by12.0% to Rmb14, with 25.7% upside room from the currentstock price, implying 36x 2017e P/E.

Risks

Price cut pressure on TCM injection; new product approvalmisses expectation.