H116 revenue/net profit growth in line

H116 revenue/net profit increased 67.22%/84.98% YoY to Rmb1.303bn/527m,respectively, with EPS of Rmb0.26. While drug manufacturing revenue grew slowerYoY, ER-KANG continued to focus on channels/profit for core/non-core products,ramping up marketing efforts for new products (eg, starch and starch capsules), whichprovide solid support for fast earnings growth.

Healthy growth in the starch segment

The starch segment produces ordinary starch, modified starch and starch capsules. InH116, the segment generated revenue of Rmb683m, up 161.09% YoY. We arepositive on its starch capsules being widely used in the pharmaceutical and foodindustry. ER-KANG was the first to commercialize starch capsules, which we think arelikely to become the core product of the starch segment. We estimate ER-KANG'sstarch capsule revenue will increase 200%/80%/50% in 2016-18, respectively, andaccount for 26%/36%/44% of the company's gross profit, with a gross profit CAGR of64%.

Finished drug segment resumed growth

In H116, ER-KANG's sulbenicillin sodium for injection generated Rmb187m in revenue,up 72.90% YoY. Affected by government policies (eg, restrictions on the use ofantibiotics and caps on drug tender prices), ER-KANG's antibiotics segment hasdecreased in the past few years, with the share of finished drugs in the company'sgross profit falling from nearly 40% in 2014 to 20% in H116. As the government stillplaces rigid restrictions on antibiotics used at level 2/3 hospitals, we think it will be hardfor the finished drug segment to record fast growth.

Valuation: Price target of Rmb19.63, maintain Buy

We derive our price target of Rmb19.63 using DCF-based methodology (7.6% WACC)and maintain our Buy rating.