Guangzhou Pharmaceutical Co. Ltd.

Transcription

1 Pharmaceutical s 12 th September 2001 Guangzhou Pharmaceutical Co. Ltd HK Price: HK$ 1.52 ACCUMULATE Fiscal Turnover Net Profit EPS Growth PER (x) CFPS Price/ EV/ Yield Yield (RMB m) (RMB m) (RMB) (%) (HK$1.52) (RMB) CFPS(x) EBITDA(x) (%) 12/99 12/00 12/01 12/02 12/03 12/04 12/05 The Company s interim headline number was certainly disappointing as net profit tumbled 34% to RMB52.1m. However, its PRC Accounting based net profit actually increased a respectable 11.6% to RMB90.8m (two tables on page 5 and page 6). The large discrepancy was due to different treatment of new Chinese accounting regulations that call for provisions for impairment of fixed assets and several other items. Consequently, the Company has written off RMB50.3m for fixed assets provision. The management stated that this is basically a one-off exercise and similar provisions will not be significant in 2H or later. Manufacturing of Chinese patent medicine accounted for 31.8% turnover but 74.6% pre-tax profit, while pharmaceutical trading business made up the remaining 68.2% turnover but only 25.4% pre-tax profit. The pharmaceutical trading is consists of three business lines: wholesale (88.1% of pharmaceutical trading turnover), retail (9.6%) and import/export (2.3%). These breakdowns were in line with previous years. Market Cap. (HKm): 1,232.6 Free Float (%): Mth Price: HK$ A-Share Price: RMB mth average daily turnover 2,050,635 Book NAV (RMB): F 5-year PEG ratio 1.70 ROE (%): 6.45 ROCE (%): 4.23 Net Gearing (%) cash Larry Jiang (larry.jiang@gtjas.com.hk) - 1 -

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3 But local competition has eroded its margins. Refer to table on page 2, gross margins for manufacturing of Chinese patent medicines, wholesale, and import/export all declined noticeably. Overall, gross margin dipped to 23.1% from 24.2% in 2000 and 24.8% in 1H00. This was largely due to the keener competitions after PRC government s pharmaceutical regulation changes. Among other things, new regulations have allowed more retail chains to open up all-over China, and the hospitals now must bid for drug supplies - inevitably taking pricing power away from old established companies. In addition, products mix was a factor as always. Overall, selling prices have declined about 3.5% compared to 1H00. However, the Company has improved its overall operation efficiency too. It said that average unit production cost of major products decreased by 3.2% compared to 1H00. Separately, the Company s receivable has increased noticeably (page 4), partly due to selling more products to hospitals. Hospitals in general pay three or more months after receiving products. But there is also an upside: hospitals are among the best customers who usually always pay up. This is evidenced by the fact that account receivable within one year has increased from about 85% of total receivable previously to roughly 90% at present. Prospects The Company has raised RMB738m in net proceeds in January this year by issuing 78m new A-share. It has completed, or in the process of completing, several projects: an ERP management system to improve overall operation efficiency; technology and GMP certification for its major production plants; 19 new categories 1 and 2 drugs under development - normally 5% of turnover of manufacturing of Chinese patent medicines are new products ; and retail stores chain expansion from 155 to 219 now. Meanwhile, we expect competition to intensify due to the government s progressive liberalization policies in anticipation of China s WTO entry. Consequently, we have assumed further margin deductions for all four merger business lines ( Gross Margin Assumptions on page 2). On the other hand, we believe that with the Company s efficiency improvement from above mentioned projects, it should be able to hold its margins going forward. Valuation The valuation is reasonable comparing to its sector peers (two tables on page 7). The trailing 2000 PER averages are 10.3 for Hong Kong listed pharmaceutical companies, 69.4 for A/B market listed, and between 25x 60x for group averages in the US, Europe, Japan and India. Its Price/book is still only 0.54 and A- share/h-share price ratio is 8.5. With possible M&A in future, we believe the share price has an upside potential of over 30% to reach HK$2.00 (13.3x 2001 PER and 30% discount to its NAV) on a 12-month horizon

4 Balance Sheet (RMB m) 1999A 2000A 2001F 2002F 2003F 2004F 2005F Fixed assets Construction in progress Deferred expenditures Interests in jointly controlled entities Interests in associated companies 12.1 Investment securities Non-Current Assets Inventories Trade and other receivables Bank balance and cash Current Assets Total Assets Trade and other payables Current portion of long-term liabilities Taxation payable Proposed dividend Short-term bank loans Current Liabilities Long-term Loans Minority Interests Share Capital Share Premium Reserves Retained Earnings Shareholders' Funds Book NAV (RMB) Net Gearing (%) cash cash cash cash cash Cash Flow (RMB m) 1999A 2000A 2001F 2002F 2003F 2004F 2005F EBIT Depreciation/ amortization Tax ( ) () () () () ( ) () Net interest ( ) () () () () ( ) () Associates/ Other () () ( ) () () () () Gross Cash Flow Capital expenditure ( ) () () () ( ) ( ) ( ) Change in WC/ Other () () ( ) ( ) ( ) Free Cash Flow Dividend () () () ( ) ( ) ( ) ( ) Investment () () ( ) ( ) ( ) ( ) Disposal Share issues Net Cash Flow Net Cash (Debt) at start () () () Net Cash (Debt) at end - 4 -

5 Ratio 1999A 2000A 2001F 2002F 2003F 2004F 2005F Net Gearing (%) Quick Ratio (x) Current Ratio (x) Debt to Total Assets (%) Cash to Current Liabilities (x) ROE (%) ROA (%) ROCE (%) Debtors (days) Creditors (days) Stock (FG+WIP)(days) Inventory Turnover (x) Fixed Assets Turnover (x) Total Assets Turnover (x) Gross Margin (%) Operating Margin (%) EBIT Margin (%) PBT Margin (%) Net Margin (%) Unaudited 1H01 Interim Based on HK GAAP (RMB m) 1H01 1H00 % Change Turnover COS ( ) () Gross Profit gross margin (%) Other Income () Dist/Ad/Other Op Cost () () Operating Income operating margin (%) Financial Cost () () Jointly controlled entities ( ) ( ) Associates () Profit Before Tax () PBT margin (%) Tax () () tax rate (%) Profit after Tax () Minority Interests () () () Net Profit net margin (%) EPS (RMB) () Source: Company data - 5 -

6 HK GAAP & PRC ACCOUNTING Reconciliation (RMB m) Net profit under PRC Accounting Amortisation of deferred expenditure capitalized Additional depreciation on revalued fixed assets Overprovision of research and development costs Bad debt provision written back Government subsidies recognized as income Impairment of fixed assets and construction in progress recognised as current period charges Prepaid expenses written off Difference in minority interests Net Profit under HK GAAP "#$ %# &# "# 2000 Sales Breakdown by Business 2000 Profit Breakdown by Business Wholesale 18.79% Retail 5.75% Import & Export 0.01% Manufacturing 75.45% Relative Performance of Guangzhou Pharmaceutical Source: Reuters - 6 -

7 Comparison with other Pharmaceutical Companies listed in Mainland China '9 Company name 4. Gross profit Net profit Gross Net EPS (RMB) Price Market PE Code (RMB, m) (RMB, m) (RMB, m) Margin(%) Margin(%) 1H A (RMB) Cap (m) (x) Shangdong Dong-E -EJiao Yunnan Baiyo Group Tsinghua Unisplendour Jilin Aodong Medicine Tonhhua Golden Horse 7.42 ChengDu Hoist Jinling Pharm Hunan Jiuzhitang Sanjiu Medical & Pharm Beijing Tong Ren Tang ChongQing Taiji Industry Tibet Rhodiola Pharm Henan Joyline & Joysun Henan Lingrui Pharm n/a Kunming Pharm n/a HangZhou TianMuShan Haci 9.73 TongHua DongBao Med Guangzhou Pharm Market Average PER (x) - Including all figures Market Average PER (x) - exlcuding the largest and the smallest figures *Period under reviewed : Year ended Dec 30, 2000 * PER based on Sept 12 share prices Source: Reuters, Guotai Junan Securities estimates Comparison with other Pharmaceutical Companies listed in HK Stock Company Name Turnover Op profit Net Profit Op. Net ROA Price Mkt cap Code (RMB, m) (RMB, m) (RMB, m) margin (%) margin (%) (%) (HKD) (HKD, m) 2000A 2001F 0327.HK Shanxi Central Pharm n/a 8018.HK SIIC Medical Sci. and Tech HK Far East Pharmaceutical HK Shandong Xinhua 1, HK China Pharmaceutical HK Everpride Biopharmaceutical n/a n/a 8049.HK Jilin Changlong n/a 0.8 n/a 8069.HK Tong Ren Tang n/a 0874.HK Guangzhou Pharm Market Average PER(x) Market Average PER(x) - excluding the largest and smallest figures * Period under reviewed : Year ended 2000 * PER based on Sept 12 share prices Source: Reuters, Guotai Junan Securities estimates - 7 -

8 Disclaimer This report has been prepared as part of the normal research activity of Guotai Junan Securities (Hong Kong) Ltd., which may, from time to time, participate as an underwriter, syndicated distributor, or market maker for the stocks mentioned. This report is intended for specific clients and other intended professional users only. Any unauthorized distribution and/or circulation of this report or the copy thereof beyond the intended scope would result in possible violation of pertinent securities laws. The content of this report is neither an offer to buy nor a solicitation to sell any securities referred therein. In compiling this report, we relied on the information and data from the sources we believe to be reliable. However, the accuracy and integrity of the sources have not been independently verified. This report may contain some forward-looking forecasts and statements derived from the assumptions for future political and economic conditions, which are inherently unpredictable and mutable. The opinion expressed is solely of the analysis and personal point of view of the analysts. It should neither be interpreted nor construed as an official position of Guotai Junan Securities (Hong Kong) Ltd. Investment in the stocks herein referred may involve various degree of risks, the readers are advised to consult their own related professionals before doing so