Company Report - img3.gelonghui.com

Friday, January 15, 2016

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule

15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1

China Traditional Chinese Medicine (570 HK) Business update and revisiting our forecasts

■ We toned down our earnings forecasts amid industry slowdown

■ Limited impact from the recent RMB devaluation for CTCM

■ Significant re-rating potential with +41% upside to our 12m TP

TCM bellwether to tap into the hospital market

CTCM announced its wholly-owned subsidiary Feng Liao Xing (Foshan) Chinese

Medicine (FLX) to collaborate with Foshan Health and Foshan Hospital to form JV

companies – Foshan Geriatric and Foshan Rehabilitation to develop its presence into

the elderly care and rehabilitation care market. The aggregate capital to be contributed

by FLX is expected to be RMB1.3bn, while Foshan Health and Foshan Hospital

contributing RMB80mn and RMB240mn, respectively. Management does not disclose

any detailed information regarding future plan, as the deal is still at preliminary stage.

Full consolidation of Tianjiang in Oct as expected

Tianjiang deal has concluded and the full consolidation has started in mid-Oct as we

expected. We tone down our top/bottom-line forecasts for FY15E-17E amid overall

slowdown in the sector. Management guided c.20% and 15%-20% growth in

FY15E/16E, we expect 18%/13%/14% bottom-line growth for Tianjiang in FY15E-17E,

down from our previous forecast of 20%/18%/16%.

Strong 55% and 46% FY15E-17E sales and EPS CAGR

We expect CTCM’s top-line to grow at 37%/110%/14% in FY15E/16E/17E, and the

strong FY16 growth is mainly driven by the Tianjiang consolidation. We estimate diluted

EPS to grow at -1%/85%/15% in FY15E/16E/17E as a result of growth in earnings and

the share base dilution arising from the equity financing for the acquisition. Our forecasts

are -12%/-8%/-12% vs. the market consensus.

Limited impact from the recent RMB devaluation

CTCM, as a domestic manufacturing company, currently has limited exposure to non-

RMB debt or asset. Since our TP is based on P/E and DCF method, we have factored

in 5% RMB depreciation into our model to reflect the latest FX fluctuation.

Reiterate our BUY rating with TP of HK$6.32

The stock price is currently trading at 13.4x FY16E PE, well below -1SD from the

historical average, which is attractive, in our view. Our TP suggests +41% upside to the

current price which implies 19x FY16E P/E. Risks: 1) price erosions; 2) high on SG&A

expenses; 3) RMB depreciation; and 4) competition from peers.

Financials

RMB mn 2013A 2014A 2015E 2016E 2017E

Revenue 1,395 2,690 3,694 7,770 8,838

Growth (%) 35.2% 92.9% 37.3% 110.3% 13.7%

Net profit 198 393 568 1,271 1,468

Growth (%) 17.8% 98.1% 44.5% 123.8% 15.5%

EPS 0.10 0.16 0.15 0.28 0.33

DPS (HK$) 0.00 0.00 0.00 0.00 0.00

P/E (x) 39.2 24.5 24.7 13.4 11.6

P/B (x) 2.7 3.0 1.9 1.6 1.4

ROE (%) 7.0% 12.1% 6.4% 12.3% 12.3%

Source: Company data, CMS (HK) estimates

Milo Liu

(852) 3189 6711

Hayden Zhang

(852) 3189 6754

[email protected] [email protected]

WHAT’S NEW

EPS & TP revised down

BUY

Previous

BUY

Price HK$4.48

12-month Target Price (Potential upside)

HK$6.3 (+41.1%)

Previous HK$7.6

Price Performance

Source: Bigdata

% 1m 6m 12m

570 HK (10.0) (20.9) 0.9 HSI (7.1) (21.0) (17.7)

Industry: Healthcare

Hang Seng Index 19,817

HSCEI 8,460

Key Data

52-week range (HK$) 3.98-7.03

Market cap (HK$ mn) 20,087

Avg. daily volume (mn) 10.37

BVPS (HK$) FY15 2.37

Shareholdings Structure Sinopharm Group 37.6%

Bin Yang 8.4%

Xiaochun Wang 8.4%

Free float 40.8%

Related Research

China Traditional Chinese Medicine (570 HK) – Best of both worlds

-40

-20

0

20

40

60

Jan/15 May/15 Sep/15 Dec/15

(%)570 HSI Index


To access our research reports on the Bloomberg terminal, type CMHK <GO> 2

Focus charts

Figure 1: TCM market size (RMB bn) Figure 2: CCMG market size (RMB bn)

Source: Euromonitor, CMS(HK) Source: Euromonitor, CMS (HK)

Figure 3: Margins and forecasts (%) Figure 4: CAPEX and forecasts (RMB mn)

Source: Company, CMS (HK) estimates

Source: Company, CMS (HK) estimates Note: The increase in CAPEX in FY15E is driven by the recent establishment of a TCM healthcare complex in Foshan and Chongqing; a new orthopedics TCM production base in Guizhou.

Figure 5: Efficiency and forecasts (days) Figure 6: Cash position and forecasts (RMB mn)

Source: Company, CMS (HK) estimates Source: Company, CMS (HK) estimates, we assume company to gradually payback its debt starting FY16.

28%

20%

20%18%

17%

17%16%

15%14%

0%

10%

20%

30%

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

TCM Market Size YoY

56%

49%

36%

26%

24%

25%

23% 21%20%

0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

TCM granules Market Size YoY

54.7%

59.2%61.5%

58.5%55.3% 55.1%

61.3% 60.2%

20.4%17.8% 19.0%

20.9% 21.6% 21.5% 20.1% 20.2%

14.2% 14.2% 14.6% 15.4% 16.4% 16.6%14.9% 15.7%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015E 2016E 2017E 1H14 1H15

Gross Margin Operating Margin Net Profit Margin

10068

95

327

541

620 9.7%

4.8%

3.5%

8.9%

7.0%7.0%

0%

2%

4%

6%

8%

10%

12%

0

100

200

300

400

500

600

700

2012 2013 2014 2015E 2016E 2017E

CAPEX CAPEX as % of sales

154 201

153 130 122 122

(63)

(218)(200) (180) (193) (192)

137

182

145 145 149 149

228

166

98 95

78 79

(300)

(200)

(100)

0

100

200

300

400

500

2012 2013 2014 2015E 2016E 2017E

AR days AP days Inv days Cash conversion cycle

134

350

440

125

173

666

0

100

200

300

400

500

600

700

2012 2013 2014 2015E 2016E 2017E



Financial Analysis

We revisit our financial forecasts by looking into CTCM and Tianjiang Pharma separately.

CTCM

FY15 top-line trajectory might be weaker than our prior expectation. We expect the core business of CTCM to

slow down to 9% for FY15E-17E amid the sector-wise slowdown, as the single-digit growth would likely to become

the new norm for the healthcare industry as well as TCM sector in the upcoming years.

We expect gross margin of CTCM to stabilize going forward. Gross margin was trending down in 1H15 due to:

1) the retailing price of certain drugs trimmed as a result of change in accounting treatment from high ex-factory price

to low ex-factory price; and 2) increase in raw material price to better accordance with the higher industry standard

imposed by the government. We believe this dip is transitory as we expect the synergy effect from the existing product

to offset the raw material price fluctuation in the upcoming years and the margin to stablilize going forward.

Figure 7: CTCM Income Statement (RMB’000) RMB '000 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Total Revenue 1,031,766 1,394,613 2,690,173 1,422,067 1,508,898 2,930,965 3,189,920 3,478,357

Cost of sales (467,753) (568,834) (1,035,850) (565,362) (607,169) (1,172,531) (1,276,126) (1,391,515)

Gross profit 564,013 825,779 1,654,323 856,705 901,729 1,758,434 1,913,794 2,086,842

SG&A expenses (353,533) (576,937) (1,075,955) (537,192) (564,851) (1,102,043) (1,199,410) (1,290,471)

Selling costs (235,661) (404,629) (903,493) (445,484) (468,977) (914,461) (995,255) (1,074,812)

General and Admin expenses (ex. R&D) (82,999) (126,361) (172,462) (91,708) (95,874) (187,582) (204,155) (215,658)

Research and Development Expenses (34,873) (45,947) (67,875) (31,566) (32,915) (64,481) (66,988) (73,046)

Operating income 210,480 248,842 510,493 287,947 303,963 591,910 647,395 723,326

Other income (net) 23,403 16,167 33,203 13,402 12,077 25,479 27,730 30,237

Finance costs (17,477) (27,434) (62,523) (10,147) 23,597 29,310 31,899 34,784

EBITDA 271,872 333,290 662,794 370,610 (11,520) (3,831) (4,169) (4,546)

Profit Before Taxes 216,406 237,575 481,173 291,202 (77,381) (87,528) (78,174) (54,743)

Income Tax (43,389) (38,218) (69,627) (46,973) (10,747) 17,000 32,715 32,146

Tax Rate 20% 16% 14% 16% (66,633) (104,527) (110,889) (86,889)

Minority interest (4,491) (894) 1,544 7,326 385,301 755,911 832,074 921,637

Net Income 168,525 198,463 393,090 223,336 238,659 529,861 596,952 698,820

Margins 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Gross margin 54.7% 59.2% 61.5% 60.2% 59.8% 60.0% 60.0% 60.0%

Operating margin 20.4% 17.8% 19.0% 20.2% 20.1% 20.2% 20.3% 20.8%

Profit before tax margin 21.0% 17.0% 17.9% 20.5% 15.8% 18.1% 18.7% 20.1%

Net margin 16.3% 14.2% 14.6% 15.7% 15.0% 15.4% 15.9% 17.1%

YOY% 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Total Revenue 25% 35% 93% 15% 4% 9% 9% 9%

Gross profit 27% 46% 100% 13% 1% 6% 9% 9%

Operating income 191% 18% 105% 16% 16% 16% 9% 12%

Net Income 188% 18% 98% 21% 9% 15% 13% 17%




Figure 8: CTCM margin trend and forecasts Figure 9: CTCM CAPEX and forecasts (RMB mn)


Source: Company, CMS (HK) estimates Note: The surge in CAPEX in FY15 is from establishment of a TCM healthcare complex in Foshan and Chongqing as well as an orthopedics TCM production base in Guizhou

54.7%

59.2%61.5%

60.0% 60.0% 60.0% 61.3% 60.2%

20.4%17.8% 19.0% 20.2% 20.3% 20.8% 20.1% 20.2%

16.3%14.2% 14.6% 15.4% 15.9% 17.1%

14.9% 15.7%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015E 2016E 2017E 1H14 1H15


100

68

95

264

159 174

9.7%

4.8%

3.5%

9.0%

5.0% 5.0%

0%

2%

4%

6%

8%

10%

12%

0

50

100

150

200

250

300

2012 2013 2014 2015E 2016E 2017E




Tianjiang Pharma

We expect Tianjiang to deliver 18%/13%/14% bottom-line growth in FY15E-FY17E, as we believe: 1) Tianjiang

is well-positioned in the fast-growing concentrated TCM granule market; and 2) increase in demand of its principal

products. We expect gross margin to largely stay put in the upcoming years, as we believe: 1) raw materials have

been trending down since FY14 and we are not expecting a dramatic rebound anytime soon; 2) the company will

implement certain measurement to hedge this unfavorable risk; and 3) potential platform synergy after consolidated

with CTCM. We are a bit conservative compared with the management guidance of c.20% and 15%-20% growth in

FY15E/16E.

Figure 10: Tianjiang Income Statement (RMB’000)

RMB '000 2012A 2013A 2014A 2015E 2016E 2017E

Total Revenue 1,891,550 2,496,931 3,128,766 3,817,095 4,580,513 5,359,201

Growth - 32% 25% 22% 20% 17%

Cost of Sales (787,078) (1,176,120) (1,461,927) (1,794,034) (2,198,646) (2,572,416)

Gross Profit 1,104,472 1,320,811 1,666,839 2,023,060 2,381,867 2,786,784

Margin 58% 53% 53% 53% 52% 52%

Other income and losses (5,028) 3,287 (9,870) - - -

Distribution and selling costs (372,710) (505,670) (674,338) (847,395) (1,030,616) (1,232,616)

% of revenue 20% 20% 22% 22% 23% 23%

Administrative expenses (121,993) (179,474) (219,742) (268,085) (321,702) (376,392)

% of revenue 6% 7% 7% 7% 7% 7%

Finance costs - - (670) - - -

PBT 604,741 638,954 762,219 907,580 1,029,549 1,177,777

Income tax expenses (87,834) (95,597) (110,499) (136,137) (154,432) (176,666)

Margin 15% 15% 14% 15% 15% 15%

Net profit 516,907 543,357 651,720 771,443 875,117 1,001,110

Growth - 5% 20% 18% 13% 14%


Figure 11: Tianjiang summarized financial ratios

2012A 2013A 2014A 2015E 2016E 2017E

Operating profit margin 58.4% 52.9% 53.3% 53.0% 52.0% 52.0%

Tax rate 14.5% 15.0% 14.5% 15.0% 15.0% 15.0%

Net margin 27.3% 21.8% 20.8% 20.2% 19.1% 18.7%

Return on assets 26.1% 19.9% 19.0% 17.1% 16.0% 14.8%

Return on equity 33.7% 26.9% 25.4% 23.1% 20.8% 19.2%

Return on investment capital 33.0% 26.5% 25.4% 23.1% 20.8% 19.2%

Total asset turnover 0.2x 0.2x 0.2x 0.2x 0.2x

Capex as % of sales 9.2% 9.3% 8.3% 8.3% 8.3% 8.3%

Current ratio 4.0x 3.0x 3.2x 3.0x 3.4x 3.4x

Quick ratio 2.2x 1.5x 1.9x 2.3x 2.4x 2.6x

Net debt to equity 2% 1% 0% 0% 0% 0%




Consolidated (CTCM+Tianjiang)

The acquisition greatly boosts earnings starting 4Q15, as Tianjiang is the market leader in the concentrated TCM

granules industry with c.50% market share and standalone revenue/net profit of RMB3.1 bn/RMB652 mn in FY14. It

is worth mentioning that we have yet to factor in the synergy effects from this acquisition, and we expect this could

serve as a catalyst to the company in the long run.

We expect gross margin to narrow amid the recent acquisition. This is mainly due to the lower margin from

Tianjiang Pharma, which diluted the blended gross margin starting FY15. On the other hand, we expect operating

margin and net margin expansion to remain intact, as we believe the company is gradually improving in operating

efficiency with increasing economies of scale.

We expect CAPEX to increase in FY15 and remain steady starting FY16. The increase in CAPEX is basically

driven by the recent establishment of a TCM healthcare complex in Foshan and Chongqing; a new orthopedics TCM

production base in Guizhou; together with the higher CAPEX contribution from Tianjiang. After this expansion we

assume the CAPEX would stay at a normal level at c.7%.

Figure 12: Margin and forecasts Figure 13: Capex and forecasts (RMB mn)



Figure 14: Efficiency and forecasts (days) Figure 15: Cash position and forecasts (RMB mn)


Source: Company, CMS (HK) estimates, we assume company to gradually payback its debt starting FY16

54.7%

59.2%61.5%

58.5%55.3% 55.1%

61.3% 60.2%

20.4%17.8% 19.0%

20.9% 21.6% 21.5% 20.1% 20.2%

14.2% 14.2% 14.6% 15.4% 16.4% 16.6%14.9% 15.7%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015E 2016E 2017E 1H14 1H15


10068

95

327

541

620 9.7%

4.8%

3.5%

8.9%

7.0%7.0%

0%

2%

4%

6%

8%

10%

12%

0

100

200

300

400

500

600

700

2012 2013 2014 2015E 2016E 2017E


154 201

153 130 122 122

(63)

(218)(200) (180) (193) (192)

137

182

145 145 149 149

228

166

98 95

78 79

(300)

(200)

(100)

0

100

200

300

400

500

2012 2013 2014 2015E 2016E 2017E

AR days AP days Inv days Cash conversion cycle

134

350

440

125

173

666

0

100

200

300

400

500

600

700

2012 2013 2014 2015E 2016E 2017E



Figure 16: Changes to our model (RMB’000)


2014

RMB '000 Actual Before After Delta % change Before After Delta % change Before After Delta % change

Total Revenue 2,690,173 3,902,898 3,694,384 (208,515) -5% 8,142,095 7,770,433 (371,662) -5% 9,572,039 8,837,558 (734,481) -8%

Cost of sales (1,035,850) (1,614,754) (1,531,338) 83,416 -5% (3,617,352) (3,474,772) 142,580 -4% (4,261,423) (3,963,932) 297,491 -7%

Gross profit 1,654,323 2,288,144 2,163,046 (125,098) -5% 4,524,743 4,295,661 (229,083) -5% 5,310,616 4,873,626 (436,990) -8%

SG&A expenses (1,075,955) (1,367,479) (1,325,139) 42,340 -3% (2,671,480) (2,551,728) 119,752 -4% (3,110,512) (2,899,478) 211,034 -7%

Selling costs (903,493) (1,125,493) (1,083,940) 41,553 -4% (2,136,864) (2,025,870) 110,993 -5% (2,480,882) (2,307,429) 173,453 -7%

General and Admin expenses (172,462) (241,986) (241,199) 787 0% (534,616) (525,857) 8,759 -2% (629,631) (592,050) 37,581 -6%

R&D Expenses (67,875) (69,069) (64,481) 4,587 (80,034) (66,988) 13,046 (91,675) (73,046) 18,629

Operating income/loss 510,493 851,596 773,426 (78,171) -9% 1,773,229 1,676,945 (96,284) -5% 2,108,429 1,901,102 (207,327) -10%

Other income (net) 33,203 18,748 5,479 (13,270) -71% 44,900 27,730 (17,170) -38% 51,431 30,237 (21,193) -41%

Finance costs (62,523) (87,656) (87,528) 128 0% (114,364) (78,174) 36,190 -32% (83,160) (54,743) 28,417 -34%

Profit Before Taxes 481,173 782,689 691,377 (91,312) -12% 1,703,765 1,626,501 (77,264) -5% 2,076,701 1,876,597 (200,104) -10%

Income Tax (69,627) (117,403) (103,707) 13,697 -12% (255,565) (243,975) 11,590 -5% (311,505) (281,490) 30,016 -10%

Tax Rate 14% 15% 15% 0% 0% 15% 15% 0% 0% 15% 15% 0% 0%

Minority interest 1,544 (17,771) (19,595) (1,824) (109,572) (111,140) (1,567) (131,384) (127,141) 4,243

Net Income 393,090 647,515 568,076 (79,439) -12% 1,338,628 1,271,386 (67,242) -5% 1,633,812 1,467,966 (165,846) -10%

Net Income (Adjusted) 393,090 647,515 568,076 (79,439) -12% 1,338,628 1,271,386 (67,242) -5% 1,633,812 1,467,966 (165,846) -10%

Basic EPS 0.1551 0.1752 0.1537 (0.0215) -12% 0.2986 0.2836 (0.0150) -5% 0.3644 0.3274 (0.0370) -10%

Diluted Net Income 393,090 647,515 568,076 (79,439) -12% 1,338,628 1,271,386 (67,242) -5% 1,633,812 1,467,966 (165,846) -10%

Diluted EPS 0.1551 0.1752 0.1537 (0.0215) -12% 0.2986 0.2836 (0.0150) -5% 0.3644 0.3274 (0.0370) -10%

Basic Weighted Average Shares 2,533,899 3,696,712 3,696,712 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0%

Diluted Weighted Average Shares 2,533,899 3,696,712 3,696,712 0 0% 4,483,748 4,483,748 0 0% 4,483,748 4,483,748 0 0%

Margins 2,014 2015E b.p. 2016E b.p. 2017E b.p.

Gross margin 61.5% 58.6% 58.5% (8) 55.6% 55.3% (29) 55.5% 55.1% (33)

SG&A 40.0% 35.0% 35.9% 83 32.8% 32.8% 3 32.5% 32.8% 31

R&D 6.4% 6.2% 6.5% 33 6.6% 6.8% 20 6.6% 6.7% 12

Operating margin 19.0% 21.8% 20.9% (88) 21.8% 21.6% (20) 22.0% 21.5% (52)

Other income 1.4% 1.1% 0.8% (30) 0.6% 0.4% (20) 0.6% 0.4% (20)

Profit before tax margin 17.9% 20.1% 18.7% (134) 20.9% 20.9% 1 21.7% 21.2% (46)

Minority interest as % of PBT -0.3% 2.3% 2.8% 56 6.4% 6.8% 40 6.3% 6.8% 45

Net margin 14.6% 16.6% 15.4% (121) 16.4% 16.4% (8) 17.1% 16.6% (46)

YOY%

Total Revenue 93% 45% 37% (775) 109% 110% 171 18% 14% (383)

Gross profit 100% 38% 31% (756) 98% 99% 85 17% 13% (391)

Operating income/loss 103% -44% 44% 8,722 139% 135% (423) 15% 15% 83

Net Income 98% 67% 45% (2,230) 107% 124% 1,707 22% 15% (659)

Diluted EPS 60% 13% -1% (1,385) 70% 85% 1,408 22% 15% (659)

2015E 2016E 2017E



Financial Model (CTCM+Tianjiang)

Figure 17: Income Statement (Consolidated, RMB’000) RMB '000 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Total Revenue 1,031,766 1,394,613 2,690,173 1,422,067 2,272,317 3,694,384 7,770,433 8,837,558

Cost of sales (467,753) (568,834) (1,035,850) (565,362) (965,976) (1,531,338) (3,474,772) (3,963,932)

Gross profit 564,013 825,779 1,654,323 856,705 1,306,341 2,163,046 4,295,661 4,873,626

SG&A expenses (353,533) (576,937) (1,075,955) (537,192) (787,947) (1,325,139) (2,551,728) (2,899,478)

Selling costs (235,661) (404,629) (903,493) (445,484) (638,456) (1,083,940) (2,025,870) (2,307,429)

General and Admin expenses (ex. R&D) (82,999) (126,361) (172,462) (91,708) (149,491) (241,199) (525,857) (592,050)

Research and Development Expenses (34,873) (45,947) (67,875) (31,566) (32,915) (64,481) (66,988) (73,046)

Operating income 210,480 248,842 510,493 287,947 485,479 773,426 1,676,945 1,901,102

Other income (net) 23,403 16,167 33,203 13,402 (7,923) 5,479 27,730 30,237

Finance costs (17,477) (27,434) (62,523) 5,713 23,597 29,310 31,899 34,784

EBITDA 271,872 333,290 662,794 7,689 (31,520) (23,831) (4,169) (4,546)

Profit Before Taxes 216,406 237,575 481,173 (10,147) (77,381) (87,528) (78,174) (54,743)

Income Tax (43,389) (38,218) (69,627) (46,973) (71,154) (118,127) (269,215) (281,490)

Tax Rate 20% 16% 14% 16% 14% 15% 15% 15%

Minority interest (4,491) (894) 1,544 7,326 (26,921) (19,595) (111,140) (127,141)

Net Income 168,525 198,463 393,090 223,336 344,740 568,076 1,271,386 1,467,966

Basic EPS 0.0945 0.0968 0.1551 0.074 0.080 0.154 0.284 0.327

Diluted Net Income 168,525 198,463 393,090 223,336 344,740 568,076 1,271,386 1,467,966

Diluted EPS 0.0945 0.0968 0.1551 0.074 0.080 0.154 0.284 0.327

Diluted Weighted Average Shares ('000) 1,783,411 2,050,558 2,533,899 3,015,543 4,377,882 3,696,712 4,483,748 4,483,748

Margins 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Gross margin 54.7% 59.2% 61.5% 60.2% 57.5% 58.5% 55.3% 55.1%

SG&A 34.3% 41.4% 40.0% 37.8% 34.7% 35.9% 32.8% 32.8%

R&D 3.4% 3.3% 2.5% 2.2% 1.4% 1.7% 0.9% 0.8%

Operating margin 20.4% 17.8% 19.0% 20.2% 21.4% 20.9% 21.6% 21.5%

Other income 2.3% 1.2% 1.4% 0.4% 1.0% 0.8% 0.4% 0.4%

Other income/(expenses) 0.0% 0.0% -0.1% 0.5% -1.4% -0.6% -0.1% -0.1%

Profit before tax margin 21.0% 17.0% 17.9% 20.5% 17.6% 18.7% 20.9% 21.2%

Net margin 16.3% 14.2% 14.6% 15.7% 15.2% 15.4% 16.4% 16.6%

YOY% 2012A 2013A 2014A 1H15A 2H15E 2015E 2016E 2017E

Total Revenue 25% 35% 93% 15% 57% 37% 110% 14%

Gross profit 27% 46% 100% 13% 46% 31% 99% 13%

Selling costs -12% 72% 123% 10% 28% 20% 87% 14%

General and Admin expenses (ex. R&D) 15% 52% 36% 20% 56% 40% 118% 13%

Research and Development Expenses 4% 32% 48% 6% -13% -5% 4% 9%

Operating income 191% 18% 105% 16% 86% 52% 117% 13%

Profit Before Taxes 183% 10% 103% 29% 56% 44% 135% 15%

Net Income 188% 18% 98% 21% 65% 45% 124% 15%

Diluted EPS 188% 2% 60% 2% -3% -1% 85% 15%

Diluted weighted average shares 0% 15% 24% 19% 45% 46% 21% 0%




Figure 18: Balance Sheet (Consolidated, RMB’000)

RMB '000 2012A 2013A 2014A 2015E 2016E 2017E

Cash and ST Investments 134,341 349,650 439,721 124,575 173,034 665,855

Cash 46,258 345,411 439,416 124,270 172,729 665,550

ST Investments 87,925 4,239 305 305 305 305

Short Term Receivables 521,341 1,016,832 1,236,400 2,068,202 3,139,717 2,758,815

Inventories - Total 161,593 405,504 417,695 1,250,217 1,586,385 1,660,101

Progress Payments & Other 13,062 23,154 - - -

Other Current Assets 0 6,164 662 2,635 2,635 2,635

Total Current Assets 817,275 1,778,150 2,094,478 3,445,629 4,901,771 5,087,406

Other receivables 14,456 161,464 12,569 12,569 12,569 12,569

Investment in Unconsolidated Subsidiaries 11,417 0 0 0 0 0

Other financial assets 8,656 1,010 1,010 1,010 1,010 1,010

Property. Plant & Equipment - Net 369,575 795,692 960,240 2,115,607 2,419,046 2,769,884

Property Plant & Equipment - Gross 549,066 1,037,105 1,264,748 2,720,587 3,260,902 3,880,473

Accumulated Depreciation 179,491 241,413 304,508 604,980 841,855 1,110,589

Construction in progress 74,432 89,245 76,074 76,074 76,074 76,074

Goodwill - - - 5,878,048 5,878,048 5,878,048

Intangible Other Assets 243,692 2,188,403 2,139,057 2,260,193 2,258,134 2,256,075

Deferred Tax Assets 20,028 52,506 48,424 70,787 70,787 70,787

Total Non-current Asset 742,257 3,288,320 3,237,374 10,414,288 10,715,669 11,064,446

Total Assets 1,559,532 5,066,470 5,331,852 13,859,916 15,617,439 16,151,852

Trade and other payables 82,481 595,763 540,113 1,650,754 2,021,155 2,155,342

Bank and other loans 415,836 583,626 501,648 715,648 715,648 (484,352)

Current taxation 26,030 50,469 47,743 96,427 101,023 106,142

Other Current Liabilities 127,124 34,530 44,337 44,337 44,337 44,337

Current portion of deferred government grants 127,124 34,530 44,337 44,337 44,337 44,337

Total Current Liabilities 651,470 1,264,388 1,133,841 2,507,166 2,882,164 1,821,469

Long Term Debt 0 668,270 670,565 2,070,565 2,070,565 2,070,565

Long Term Debt Excluding Capitalized Leases 0 668,270 670,565 2,070,565 2,070,565 2,070,565

Deferred Taxes 24,939 269,600 245,022 245,022 245,022 245,022

Non-Equity Reserves 14,432 29,449 25,302 99,704 99,704 99,704

Total Non-current Liabilities 59,399 967,319 940,889 2,415,291 2,415,291 2,415,291

Total Liabilities 696,438 2,231,707 2,074,730 4,922,457 5,297,455 4,236,760

Non-Equity Reserves 14,432 235,087 0 0 0 0

Minority Interest 17,134 74,910 73,366 419,293 530,432 657,573

Common Equity 831,529 2,524,766 3,183,756 8,518,166 9,789,552 11,257,519

Common Stock 145,099 2,306,840 2,542,246 7,308,581 7,308,581 7,308,581

Capital Surplus 430,815 319 0 0 0 0

Other Appropriated Reserves (41,049) (64,539) (53,039) (53,039) (53,039) (53,039)

Retained Earnings 161,816 288,132 653,512 1,221,588 2,492,974 3,960,940

Unrealized Foreign Exchange Gain(Loss) 129,576 110,236 (116,909) (116,909) (116,909) (116,909)

Unrealized Gain(Loss) On Marketable Securities 5,272 (116,222) 157,946 157,946 157,946 157,946

Total Equity 863,095 2,834,763 3,257,122 8,937,459 10,319,985 11,915,092

Total Liabilities & Shareholders' Equity 1,559,532 5,066,470 5,331,852 13,859,916 15,617,439 16,151,852




Figure 19: Cash Flow (Consolidated, RMB’000) RMB '000 2012A 2013A 2014A 2015E 2016E 2017E

Net Income/Starting Line 216,406 237,575 481,173 691,377 1,626,501 1,876,597

Depreciation & Amortization 37,990 68,281 119,098 150,890 236,875 268,734

Depreciation 37,990 68,281 69,108 100,900 186,885 218,744

Amortization of Intangible Assets 0 - 49,990 49,990 49,990 49,990

Impairment loss/(written back) - - 4,300 - -

Finance cost 19,389 35,182 64,217 104,527 110,889 86,889

Interest income (20,265) (7,748) (1,694) (17,000) (32,715) (32,146)

Gains/Loss On Disposal Of Assets 361 892 559 559 559 559

Other Cash Flow (skipped) 58,713 - - 370 2,059 2,060

Extraordinary Items (2,031) (9,512) 2,190 - - -

Operating profit before change in working capital 251,849 324,670 669,843 930,724 1,944,168 2,202,692

Funds from/for Other Operating Activities (32,883) (189,059) (252,000) 379,825 (1,037,281) 441,372

Dec(Inc) In Receivables (79,396) (230,729) (223,624) 262,055 (1,071,515) 380,902

Dec/(Inc) In Inventories 28,737 (64,383) (12,191) (18,341) (336,168) (73,716)

Inc(Dec) In Accounts Payable 17,776 106,053 (16,185) 136,111 370,402 134,186

Taxation (Cash Flow) (33,400) (50,752) (92,844) (102,433) (239,379) (276,371)

Cash from Operating Activities 185,567 84,859 324,999 1,208,116 667,507 2,367,694

Capital Expenditures Additions to Fixed Assets (100,254) (67,526) (94,604) (327,350) (540,874) (620,130)

Addition to Other Assets 0 (26,547) (11,818) - - -

Net Assets from Acquisitions 0 (1,429,817) - - - -

Increase In Investments 0 (5,000) (5,000) - - -

Decrease In Investments 0 9,733 10,000 - - -

Disposal of Fixed Assets 0 16 14,572 - - -

Deposits with banks (83,922) 83,386 3,934 - - -

Interest received 20,265 3,765 1,694 17,000 32,715 32,146

Acquisition of subsidiaries - - - (7,468,021)

- -

Others (18,393) - - - -

Cash from Investing Activities (182,304) (1,431,990) (81,222) (7,778,371) (508,159) (587,984)

Long Term Borrowings 563,181 1,247,777 749,648 1,400,000 - -

Net Proceeds From Sale/Issue of Com & Pref 0 1,016,335 - 4,766,335 - -

Proceeds from related party 0 5,000 (5,000) - -

Reduction In Long Term Debt (421,017) (577,301) (821,884) - - (1,000,000)

Inc(Dec) In Short Term Borrowings 0 - - 200,000 - (200,000)

Other Sources - Financing 0 (7,683) (8,231) - -

Common Dividends (Cash) (108,824) - - - - -

Interest Paid (Cash Flow) (24,639) (35,182) (64,217) (104,527) (110,889) (86,889)

Cash from Financing Activities 8,700 1,648,946 (149,684) 6,261,807 (110,889) (1,286,889)

Effect of Exchange Rate on Cash/Cash Equivalent (6) (2,662) (88) - - -

Net Change in Cash 11,957 299,153 94,005 (308,448) 48,459 492,821

Net Cash - Beginning Balance 34,336 46,258 345,411 439,416 130,968 179,427

Net Cash - Ending Balance 46,293 345,411 439,416 130,968 179,427 672,249




Valuation

DCF Analysis

Our DCF-based valuation suggests the 12-month target price of HK$6.32. The key assumptions are as follows:

1) We set risk free rate at 3.20%.

2) We assume equity risk premium at 10.00% and beta of 0.83. This gives us the company’s cost of equity at 11.5%.

3) Assuming CTCM borrows at 6% interest rate level and its effective tax rate remains at 15.0%, we estimate the

weighted average cost of capital (WACC) to be 10.0%.

4) We set the terminal growth rate at 2%.

Figure 20: DCF analysis


We use our sensitivity analysis to determine the high end (HK$7.1, implying 21x 2016E P/E), the midpoint (HK$6.3,

corresponding 19x 2016E P/E) and the low end (HK$5.8, implying 17x 2016E P/E). Parameters include WACC

(9.5%/10.5%/11.5%) and terminal rate (1%/2%/3%).

Figure 21: Sensitivity analysis


COE WACC 9.5% 9.5% 9.5% 10.5% 10.5% 10.5% 11.5% 11.5% 11.5%

Risk Free rate 3.2% Perpetuity 1% 2% 3% 1% 2% 3% 1% 2% 3%

Beta 0.83 2015E-2025E $13,403,132 $13,403,132 $13,403,132 $13,179,014 $13,179,014 $13,179,014 $12,960,456 $12,960,456 $12,960,456

Equity Risk premium 10.0% 2026E-2030E $6,183,522 $6,183,522 $6,183,522 $5,951,005 $5,951,005 $5,951,005 $5,728,513 $5,728,513 $5,728,513

Adjusted industry risk premium 0% Terminal $5,554,659 $6,359,710 $7,413,273 $4,336,618 $4,896,073 $5,605,135 $3,427,281 $3,826,360 $4,319,573

COE 11.5% NAV $25,141,313 $25,946,365 $26,999,927 $23,466,638 $24,026,093 $24,735,155 $22,116,249 $22,515,329 $23,008,541

Share count ('000) 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748 4,483,748

WACC NAV/share $5.61 $5.79 $6.02 $5.23 $5.36 $5.52 $4.93 $5.02 $5.13

WACC = Re x E/V + Rd x (1-corporate tax rate) x D/V 1.18 HKD/RMB $6.62 $6.83 $7.11 $6.18 $6.32 $6.51 $5.82 $5.93 $6.06

Re 11.50%

E 8,937,459

D 2,786,213

V 11,723,672

Rd 6%

Tc 15%

WACC 10.0%

WACC 1.0% 2.0% 3.0%

9.5% $6.6 $6.8 $7.1

10.5% $6.2 $6.3 $6.5

11.5% $5.8 $5.9 $6.1

Terminal rate



P/E Analysis

Our DCF based target price of HK$6.32 is corresponding to 19x 16E PE. We compare it with two sets of

comparables: 1) A-share leading names, such as Beijing TRT (600085 CH) and Yunnan Baiyao (000538 CH), which

currently are all trading at 19x FY16E PE; and 2) Hong Kong listed peers such as Livzon Pharma (1513 HK) and

Tongrentang CM (8138 HK), all trading at north of 18x FY16E PE. We believe a premium vs its peers is justified,

given: 1) bellwether in the TCM industry; 2) Tianjiang acquisition to tap into the fast growing CCMG market; and 3)

SOE platform allows the company to leverage this resource in the long run. The stock price is currently trading at

13.4x FY16E PE, well-below one standard deviation from historical average which we belive is attractive.

Figure 22: Peers valuation comparison Name 中文名 Stock

Code Mkt Cap –––––––P/E––––––– –––––––P/B––––––– –––––PEG–––––– Gross Margin (%)

(HK$ mn) 14A 15E 16E 14A 15E 16E 14A 15E 16E 14A 15E 16E

CTCM 中国中药 570 HK 20,087 24.5 24.7 13.4 3.0 1.9 1.6 0.78 0.77 0.45 61.5 58.5 55.3

A-share peers

YUNNAN BAIYAO 云南白药 000538 CH 76,433 26.2 22.2 18.6 5.9 4.7 3.9 1.4 1.2 1.0 29.8 30.4 30.6

TASLY PHARMA 天士力 600535 CH 53,396 38.5 50.9 43.3 5.3 7.2 6.4 2.2 2.9 2.5 42.6 44.8 44.7

BEIJING TONGRE 同仁堂 600085 CH 34,909 20.3 21.6 18.8 3.1 3.0 2.6 1.4 1.5 1.3 34.7 35.4 36.2

BAIYUNSHAN 白云山 600332 CH 45,432 31.1 23.8 20.0 8.8 5.7 4.7 1.6 1.2 1.0 37.0 39.1 40.1

JIANGSU KANION 康缘药业 600557 CH 12,867 36.1 26.2 21.0 4.7 3.9 3.3 1.8 1.3 1.1 74.4 74.8 74.3

Simple average 30.5 28.9 24.3 5.6 4.9 4.2 1.7 1.6 1.4

Weighted average 29.8 29.5 25.0 5.8 5.2 4.4 1.7 1.7 1.4

Hong Kong peers

BAIYUNSHAN PH 白云山 874 HK 34,910 20.3 16.0 14.2 3.1 1.9 1.7 1.3 1.0 0.9 34.7 33.7 34.0

LIVZON PHARM 丽珠集团 1513 HK 15,241 22.3 24.0 21.7 2.9 3.4 3.1 2.6 2.8 2.5 48.3 na na

TONG REN TANG 同仁堂科技 1666 HK 7,735 30.8 21.8 18.1 6.0 4.4 3.7 1.3 0.9 0.8 71.4 69.3 69.3

CHINA SHINEWAY 神威药业 2877 HK 7,468 11.1 9.3 9.0 1.6 1.2 1.1 N/A N/A N/A 66.3 65.5 65.5

TONGRENTANGCM 同仁堂国药 8138 HK 19,347 28.4 17.6 14.9 4.0 2.6 2.3 1.5 0.9 0.8 60.9 60.5 60.4

Simple average 22.6 17.7 15.6 3.5 2.7 2.4 1.7 1.4 1.3

Weighted average 22.7 17.7 15.6 3.8 3.0 2.6 1.5 1.2 1.1

Source: Bloomberg, CMS (HK), as of 14 Jan 2016

Figure 23: Rolling 12m forward P/E band

Source: Bloomberg, CMS (HK)

1

2

3

4

5

6

7

8

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

24x

Price (HKD)27X

20x

16x

13x



Figure 24: Peers valuation comparison

Source: Bloomberg, CMS (HK), as of 14 Jan 2016

14A 15E 16E 14A 15E 16E

JIANGSU HENGRUI MEDICINE C-A 恒瑞医药 600276 CH RMB 86,712 37.1 39.9 31.5 7.1 8.3 6.8

YUNNAN BAIYAO GROUP CO LTD-A 云南白药 000538 CH RMB 64,785 26.2 22.2 18.6 5.9 4.7 3.9

BEIJING TONGRENTANG CO-A 同仁堂 600085 CH RMB 45,259 38.5 50.9 43.3 5.3 7.2 6.4

SHANGHAI FOSUN PHARMACEUTI-A 复星医药 600196 CH RMB 45,165 22.9 19.7 16.7 2.9 2.5 2.1

TASLY PHARMACEUTICAL GROUP-A 天士力 600535 CH RMB 38,508 31.1 23.8 20.0 8.8 5.7 4.7

HUNAN ER-KANG PHARMACEUTI -A 尔康制药 300267 CH RMB 32,363 62.7 54.3 40.3 11.1 14.8 11.2

HUADONG MEDICINE CO LTD-A 华东医药 000963 CH RMB 31,430 30.2 27.8 21.8 10.1 9.9 6.9

AIER EYE HOSPITAL GROUP CO-A 爱尔眼科 300015 CH RMB 29,758 58.0 70.3 53.0 8.9 11.4 10.1

JOINTOWN PHARMACEUTICAL-A 九州通 600998 CH RMB 27,340 50.2 41.0 34.6 3.8 3.3 3.1

SHENZHEN SALUBRIS PHARM-A 信立泰 002294 CH RMB 26,935 22.3 20.7 17.1 6.1 5.9 4.7

LEPU MEDICAL TECHNOLOGY-A 乐普医疗 300003 CH RMB 25,619 45.7 43.0 33.1 6.1 7.0 6.0

SICHUAN KELUN PHARMACEUTIC-A 科伦药业 002422 CH RMB 22,896 21.0 21.5 18.1 2.0 1.3 1.2

CHINA RESOURCES SANJIU MED-A 华润三九 000999 CH RMB 22,476 21.4 18.3 16.2 3.3 2.9 2.6

HUALAN BIOLOGICAL ENGINEER-A 华兰生物 002007 CH RMB 22,090 35.9 33.6 28.1 5.7 5.6 4.8

XIZANG HAISCO PHARMACEUTIC-A 海思科 002653 CH RMB 19,445 40.8 30.3 24.2 8.8 7.1 5.7

ZHEJIANG CONBA PHARMACEUTI-A 康恩贝 600572 CH RMB 18,830 22.1 22.5 18.4 4.4 5.0 4.1

HARBIN GLORIA PHARMACEUTIC-A 誉衡药业 002437 CH RMB 18,325 39.7 26.5 20.3 n.a. n.a. n.a.

BEIJING SL PHARMACEUTICAL -A 双鹭药业 002038 CH RMB 17,814 26.1 23.4 20.2 5.7 4.8 4.1

JIANGSU YUYUE MEDICAL EQU-A 鱼跃医疗 002223 CH RMB 17,479 44.6 42.7 32.1 7.6 8.0 6.5

ZHEJIANG HUAHAI PHARMACEUT-A 华海药业 600521 CH RMB 17,449 42.8 39.7 29.8 3.5 4.9 4.4

TIANJIN CHASE SUN PHARM-A 红日药业 300026 CH RMB 16,258 30.9 26.4 21.2 5.9 4.0 4.0

SHIJIAZHUANG YILING PHARMA-A 以岭药业 002603 CH RMB 15,377 46.3 33.0 26.7 3.6 3.1 2.8

GUIZHOU YIBAI PHARMACEUTIC-A 益佰制药 600594 CH RMB 12,069 27.4 26.7 19.0 3.9 2.9 2.5

BEIJING BEILU PHARMACEUTIC-A 北陆药业 300016 CH RMB 8,689 53.0 69.7 51.2 7.3 11.1 9.5

GUANGDONG ZHONGSHENG PHA-A 众生药业 002317 CH RMB 8,035 31.0 25.1 19.2 3.7 3.8 3.2

CHONGQING LUMMY PHAR-A 莱美药业 300006 CH RMB 6,951 n.a n.a. n.a. 6.1 n.a. n.a.

ZHEJIANG XIANJU PHARMA-A 仙琚制药 002332 CH RMB 6,939 n.a 34.4 24.2 4.6 n.a. n.a.

INNER MONGOLIA FURUI MEDIC-A 福瑞股份 300049 CH RMB 5,970 46.4 55.3 38.7 4.9 5.6 5.0

HENAN LINGRUI PHARMACEUTIC-A 羚锐制药 600285 CH RMB 5,655 59.7 43.1 29.7 2.9 2.9 2.7

Simple Average 37.6 35.2 27.4 5.7 5.9 5.0

Weighted Average 35.3 34.0 27.1 6.0 6.0 5.0

14A 15E 16E 14A 15E 16E

SINOPHARM GROUP CO-H 国药控股 1099 HK HKD 80,107 19.8 18.1 15.4 2.2 2.1 1.8

SHANGHAI PHARMACEUTICALS-H 上海医药 2607 HK HKD 49,122 14.6 11.7 10.4 1.4 1.1 1.0

SIHUAN PHARMACEUTICAL HLDGS 四环医药 460 HK HKD 45,364 25.8 18.1 15.3 4.6 3.5 3.0

CSPC PHARMACEUTICAL GROUP LT 石药集团 1093 HK HKD 43,742 31.9 25.9 20.8 5.0 4.8 4.1

SINO BIOPHARMACEUTICAL 中国生物制药 1177 HK HKD 40,174 23.0 22.2 18.6 5.3 4.8 3.8

GUANGZHOU BAIYUNSHAN PHARM-H 白云山 874 HK HKD 34,897 20.3 16.0 14.2 3.1 2.0 1.7

3SBIO INC 三生制药 1530 HK HKD 24,600 n.a. 35.3 26.0 n.a. 3.8 3.6

LUYE PHARMA GROUP LTD 绿叶制药 2186 HK HKD 23,779 39.6 24.9 20.5 5.4 3.5 3.0

CHINA MEDICAL SYSTEM HOLDING 康哲药业 867 HK HKD 23,306 23.7 18.4 14.9 6.2 3.7 3.1

SHANDONG WEIGAO GP MEDICAL-H 山东威高 1066 HK HKD 21,755 20.9 15.5 13.4 2.3 1.7 1.6

CHINA TRADITIONAL CHINESE ME 中国中药 570 HK HKD 20,087 22.0 20.1 12.3 2.9 1.5 1.4

TONG REN TANG TECHNOLOGIES-H 同仁堂科技 1666 HK HKD 15,241 22.3 24.0 21.7 2.9 3.4 3.1

BEIJING TONG REN TANG CHINES 同仁堂国药 8138 HK HKD 7,735 30.8 21.8 18.1 6.0 4.4 3.7

CHINA SHINEWAY PHARMACEUTICA 神威药业 2877 HK HKD 7,468 11.1 9.3 9.0 1.6 1.2 1.1

HUA HAN BIO-PHARMACEUTICAL H 华瀚生物制药 587 HK HKD 7,023 18.2 13.6 10.6 1.2 0.8 n.a.

SHANGHAI FUDAN-ZHANGJIANG-H 复旦张江 1349 HK HKD 6,350 40.6 38.9 30.7 7.4 6.8 5.5

BLOOMAGE BIOTECHNOLOGY 华熙生物科技 963 HK HKD 5,839 21.0 23.4 17.7 4.5 5.1 4.0

SSY GROUP LTD 石四药集团 2005 HK HKD 5,576 21.3 11.4 9.4 3.2 1.7 1.5

PHOENIX HEALTHCARE GROUP CO 凤凰医疗 1515 HK HKD 5,428 40.9 18.8 14.1 5.9 2.5 2.2

UNIVERSAL HEALTH INTERNATION 大健康国际 2211 HK HKD 5,060 9.0 8.0 7.2 1.6 1.4 1.2

THE UNITED LABORATORIES INTE 联邦制药 3933 HK HKD 4,995 10.8 8.4 7.4 1.1 0.7 0.6

LEE'S PHARMACEUTICAL HLDGS 李氏大药厂 950 HK HKD 4,900 31.9 20.5 18.3 6.6 4.1 3.4

CONSUN PHARMACEUTICAL GROUP 康臣药业 1681 HK HKD 4,330 22.3 13.6 11.0 3.3 2.3 2.0

PW MEDTECH GROUP LTD 普华和顺 1358 HK HKD 2,677 26.3 10.4 9.0 2.2 1.0 0.9

CHINA PIONEER PHARMA HOLDING 中国先锋医药 1345 HK HKD 2,653 24.4 7.7 6.6 5.8 1.7 1.5

Simple Average 23.8 18.2 14.9 3.8 2.8 2.5

Weighted Average 22.1 19.5 16.0 3.4 2.9 2.5

Name 中文名 Code Currency

Name 中文名 Code CurrencyMkt Cap

(million)PE PB

Mkt Cap

(million)PE PB



Financial Summary

Balance Sheet

RMB million FY13 FY14 2015E 2016E 2017E

Cash and ST investments 350 440 125 173 666

Inventories 406 418 1,250 1,586 1,660

Other current assets 6 1 3 3 3

Total Current Assets 1,778 2,094 3,446 4,902 5,087

Property. plant & equipment 796 960 2,116 2,419 2,770

Other assets 89 76 76 76 76

Goodwill 0 0 5,878 5,878 5,878

Deferred tax assets 53 48 71 71 71

Total Non-current Asset 3,288 3,237 10,414 10,716 11,064

Total Assets 5,066 5,332 13,860 15,617 16,152

Trade and other payables 596 540 1,651 2,021 2,155

Bank and other loans 584 502 716 716 -484

Current taxation 50 48 96 101 106

Other Current Liabilities 35 44 44 44 44

Total Current Liabilities 1,264 1,134 2,507 2,882 1,821

Long term debt 668 671 2,071 2,071 2,071

Deferred taxes 270 245 245 245 245

Total Non-current Liabilities 967 941 2,415 2,415 2,415

Total Liabilities 2,232 2,075 4,922 5,297 4,237

Non-equity reserves 235 0 0 0 0

Minority interest 75 73 419 530 658

Common equity 2,525 3,184 8,518 9,790 11,258

Total Equity 2,835 3,257 8,937 10,320 11,915

BPS (US) 1.38 1.29 1.99 2.30 2.66

Cashflow Statement

RMB million FY13 FY14 2015E 2016E 2017E

PBT 238 481 691 1,627 1,877

Depreciation and amortization 68 119 151 237 269

Finance cost 35 64 105 111 87

Interest income -8 -2 -17 -33 -32

Operating profit before change in WC 325 670 931 1,944 2,203

Funds from other operating activities -189 -252 380 -1,037 441

Cash from operating activities 85 325 1,208 668 2,368

Capital expenditure -68 -95 -327 -541 -620

Acquisition of subsidiaries 0 0 -7,468 0 0

Cash from Investing Activities -1,432 -81 -7,778 -508 -588

Long term borrowings 1,248 750 1,400 0 0

Net Proceeds From Issue of shares 1,016 0 4,766 0 0

Reduction In Long Term Debt -577 -822 0 0 -1,000

Inc(Dec) In Short Term Borrowings 0 0 200 0 -200

Cash from Financing Activities 1,649 -150 6,262 -111 -1,287

Net Change in Cash 299 94 -308 48 493

Net Cash - Beginning Balance 46 345 439 131 179

Net Cash - Ending Balance 345 439 131 179 672

Profit & Loss Statement RMB million FY13 FY14 2015E 2016E 2017E

Revenue 1,395 2,690 3,694 7,770 8,838

Cost of sales -569 -1,036 -1,531 -3,475 -3,964

Gross profit 826 1,654 2,163 4,296 4,874

Other incomes and expenses 16 33 5 28 30

Selling expenses -405 -903 -1,084 -2,026 -2,307

Administrative expenses -126 -172 -241 -526 -592

Operating profit 249 510 773 1,677 1,901

Interest Income 8 2 17 33 32

Interest Expense -35 -64 -105 -111 -87

PBT 238 481 691 1,627 1,877

Income tax -38 -70 -104 -244 -281

Net Profit 198 393 568 1,271 1,468

EBITDA 333 663 930 1,942 2,200

EPS (RMB) - Basic 0.097 0.155 0.154 0.284 0.327

EPS (RMB) - Diluted 0.10 0.16 0.15 0.28 0.33

DPS (RMB) 0.000 0.000 0.000 0.000 0.000

Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%

Financial Ratios

FY13 FY14 2015E 2016E 2017E

Growth (YoY)

Revenue 35.2% 92.9% 37.3% 110.3% 13.7%

Gross profit 46.4% 100.3% 30.8% 98.6% 13.5%

Operating profit 18.2% 105.1% 51.5% 116.8% 13.4%

Net profit 17.8% 98.1% 44.5% 123.8% 15.5%

EPS 2.4% 60.3% -0.9% 84.5% 15.5%

Diluted weighted average shares 15.0% 23.6% 45.9% 21.3% 0.0%

Margin

Gross Margin 59.2% 61.5% 58.5% 55.3% 55.1%

Operating Margin 17.8% 19.0% 20.9% 21.6% 21.5%

Net Profit Margin 14.2% 14.6% 15.4% 16.4% 16.6%

Efficiency

Inventory Days 182 145 145 149 149

Trade Receivable Days 201 153 130 122 122

Account Payable Days 218 200 180 193 192

Financial Ratios

Current Ratio (x) 1.4 1.8 1.4 1.7 2.8

Quick Ratio (x) 1.1 1.5 0.9 1.1 1.9

Net debt/equity 31.8% 22.5% 29.8% 25.3% 7.7%

ROA 3.9% 7.4% 4.1% 8.1% 9.1%

ROE 7.0% 12.1% 6.4% 12.3% 12.3%

Valuation Comparison

P/B (x) 2.7 3.0 1.9 1.6 1.4

P/E (x) 39.2 24.5 24.7 13.4 11.6

Source: Company data, CMS (HK) estimates



Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

Analyst Disclosure

The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the

personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst’s compensation was, is, or will be directly or indirectly, related to the specific

recommendations or views expressed in this research report.

Regulatory Disclosure

Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html.

Disclaimer

This document is prepared by China Merchants Securities (HK) Co., Limited (CMS HK). CMS HK is a licensed corporation to carry on Type 1 (dealing in securities), Type 2 (dealing in futures),

Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance (Chapter 571). This

document is for information purpose only. Neither the information nor opinion expressed shall be construed, expressly or impl iedly, as an advice, offer or solicitation of an offer, invitation,

advertisement, inducement, recommendation or representation of any kind or form whatsoever to buy or sell any security, financial instrument or any investment or other specific product. The

securities, instruments or strategies discussed in this document may not be suitable for all investors, and certain investors may not be eligible to participate in some or all of them. Certain services

and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. CMS HK is not registered as a broker-

dealer in the United States and its products and services are not available to U.S. persons except as permitted under SEC Rule 15a-6.

The information and opinions, and associated estimates and forecasts, contained herein have been obtained from or are based on sources believed to be reliable. CMS HK, its holding or affiliated

companies, or any of its or their directors, officers or employees (CMS Group) do not represent or warrant, expressly or impliedly, that it is accurate, correct or complete and it should not be relied

upon. CMS Group will not accept any responsibility or liability whatsoever for any use of or reliance upon this document or any of the content thereof. The contents and information in this document

are only current as of the date of their publication and will be subject to change without prior notice. Past performance is not indicative of future performance. Estimates of future performance are

based on assumptions that may not be realized. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Opinions

expressed herein may differ or be contrary to those expressed by other business divisions or other members of CMS Group as a result of using different assumptions and/or criteria.

This document has been prepared without regard to the individual financial circumstances and investment objectives of the persons who receive it. Use of any information herein shall be at the

sole discretion and risk of the user. Investors are advised to independently evaluate particular investments and strategies, take financial and/or tax advice as to the implications (including tax) of

investing in any of the securities or products mentioned in this document, and make their own investment decisions without relying on this publication.

CMS Group may have a long or short position, make markets, act as principal or agent, or engage in transactions in securities of companies referred to in this document and may also perform or

seek to perform investment banking services or provide advisory or other services for those companies. This document is for the use of intended recipients only and this document may not be

reproduced, distributed or published in whole or in part for any purpose without the prior consent of CMS Group. CMS Group wi ll not be liable for any claims or lawsuits from any third parties

arising from the use or distribution of this document. This document is for distribution only under such circumstances as may be permitted by applicable law. This document is not directed at you

if CMS Group is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. In particular, this document is only made available to certain US persons

to whom CMS Group is permitted to make available according to US securities laws, but cannot otherwise be made available, distributed or transmitted, whether directly or indirectly, into the US

or to any US person. This document also cannot be distributed or transmitted, whether directly or indirectly, into Japan and Canada and not to the general public in the People’s Republic of China

(for the purpose of this document, excluding Hong Kong, Macau and Taiwan).

http://www.newone.com.hk/cmshk/en/disclosure.html



Important Disclosures for U.S. Persons

This research report was prepared by CMS HK, a company authorized to engage in securities activities in Hong Kong. CMS HK is not a registered broker-dealer in the United States and, therefore,

is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution solely to major U.S. institutional

investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act).

Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should

do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of

this research report effect any transaction to buy or sell securities or related financial instruments through CMS HK. Rosenblatt Securities Inc. accepts responsibility for the contents of this research

report, subject to the terms set out below.

The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (FINRA) and may not be an associated

person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading

securities held by a research analyst account.

Ownership and Material Conflicts of Interest

Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in

the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or

sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication.

Compensation and Investment Banking Activities

Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment

banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the

subject company in the next 3 months.

Additional Disclosures

This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial

situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities,

markets, reports or developments referred to in this research report. Neither CMS HK nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error,

inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use

of this research report.

CMS HK may rely on information barriers, such as Chinese Walls to control the flow of information within the areas, units, divisions, groups, or affiliates of CMS HK.

Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be

registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited.

Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States.

The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to

exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments.

Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by CMS HK with respect to future performance. Income from

investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any

recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates,

in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein.

No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of CMS HK and CMS HK accepts no liability whatsoever

for the actions of third parties in this respect.

Hong Kong

China Merchants Securities (HK) Co., Ltd.

Address: 48/F, One Exchange Square, Central, Hong Kong

Tel: +852 3189 6888Fax: +852 3101 0828

Company Report - img3.gelonghui.com

Documents

Transcript of Company Report - img3.gelonghui.com