20150827-DBS_Group-CCMG_to_drive_stable_earnings_growth_ahead_11页_342kb

CR Sanjiu Medical & Pharmaceutical Summary

Core Information

• Company Name: CR Sanjiu Medical & Pharmaceutical
• Stock Code: Bloomberg: 000999 CH Equity | Reuters: 000999.SZ
• Industry: Healthcare
• Sector: Pharmaceuticals & Biotechnology
• Analyst: Mark KONG CFA
• Date: 27 August 2015
• Rating: BUY
• Last Traded Price: RMB23.38
• Price Target: RMB36.2
• Upside: 55%
• Potential Catalysts: M&A, lowering of operating cost
• Market Cap: RMB22,887 million (US$3,569 million)
• Issued Capital: 979 million shares
• Free Float: 36.4%
• 3m Avg. Daily Valuation: US$72.3 million
• ROAE: 16.3% (2014A), 16.7% (2015F-2017F)

Key Financial Forecasts (FY Dec)

Investment Thesis

Rationale

• CR Sanjiu is the third largest concentrated Chinese medicine granule (CCMG) maker with a 11% market share in 2014.
• The company is well known in the over-the-counter (OTC) drugs market.
• Its brand "999" was ranked no.1 in Chinese medicine brand reputation by the China Association of Traditional Chinese Medicine in 2014.
• CCMG market in China is expected to grow at a 30% CAGR from 2014 to 2019.
• The convenience of CCMG compared to traditional herbal medicine is a key driver of this growth.
• 15 provinces have included CCMG on their medical insurance coverage list.
• The number of Chinese medicine hospitals in rural areas is expected to grow at 17.5% CAGR from 2012 to 2020.
• The proportion of community health centres and clinics in villages offering Chinese medicine services is expected to increase to 100% by 2020.
• The company has a strong balance sheet and financial resources for M&A.

Valuation

• Target Price: RMB36.2
• Valuation Basis: 28x 12-month forward PE
• Discount to Target PE: 20% compared to the CCMG industry leader, China Traditional Chinese Medicine (CTCM, 570 HK).
• Reason for Discount: Smaller CCMG business scale and slower EPS CAGR compared to CTCM.

Key Assumptions

Sensitivity Analysis

Segmental Breakdown (RMB m)

Financial Highlights

• 2Q15 Earnings: Missed consensus by 8% due to sales growth slowdown.
• Sales Growth: Slowed from 8% in 1Q15 to 4% in 2Q15.
• Net Cash: RMB1.1 billion as of end Mar-15.
• Balance Sheet: Strong and stable.
• CCMG Contribution: Expected to make up 11-16% of the company's revenue from 2015F to 2017F.
• Sales Growth for CCMG: 50% in 2015F, 30% in 2016F and 2017F.
• Net Margin Expansion: From 14.2% in 2014 to 15.4% in 2017F.
• Operating Cost Reduction: From 45% in 2014 to 44% in 2015.
• EPS Growth: 15.2% in 2015F, 11.8% in 2016F, and 12.2% in 2017F.
• Pre-tax Profit Growth: 15.2% in 2015F, 11.8% in 2016F, and 12.2% in 2017F.

Peer Comparison

Risks

• Volatility of Raw Material Costs: Over 600 kinds of herbs are used, and price fluctuations can impact gross margin.
• Potential for More Competitors: The PRC government may allow more players to enter the CCMG industry.

Conclusion

• Maintain BUY: Despite the Q2 earnings miss, the company is expected to drive stable earnings growth through CCMG expansion and cost control.
• Target Price: RMB36.2, based on 28x 12-month forward PE.
• Financial Strength: The company has a strong balance sheet with substantial cash reserves and support from its parent company.
• Growth Drivers: CCMG segment growth, M&A opportunities, and continued cost reduction efforts.