Sustainable Growth Supported By Many Factors, Buy

Transcription

1 GTJA Research 国泰君安研究 Company Report: Tong Ren Tang Technologies (01666 HK) Johnson Sun 孙凤强 公司报告 : 同仁堂科技 (01666 HK) johnson.sun@gtjas.com.hk Sustainable Growth Supported By Many Factors, Buy 多重因素保障其持续增长, 买入 Growth of TRTT has been speeding up since Net profit grew by 28.6% YoY in 2011 and 28.5% YoY in 1-3Q2012, compared to net profit CAGR of 7.5% in We have successfully predicated the Company s great change, which is mainly attributed to the management incentive scheme launched in Apr We think TRTT has the following great potential for sustainable growth. 1) reputable brand name, 2) rich product mix, 3) potential of cosmeceutical products, 4) Price increase potential, 5) potential in customer education, 6) current low distribution coverage rate to be improved, 7) improving synergies inside TRT Group. 8) Spin-off of TRT Chinese Medicines. In a coming series of reports, each of these potentials will be discussed in detail separately. Buy with TP of HK$ We maintain our basic assumption that the net profit CAGR of the Company will be over 30% in EPS is estimated to be RMB0.564, and for 2012/13/14. With visible and expectable fast growth, we simply value it at 30x2013 PE, or HK$27.50 and upgrade it from Accumulate to Buy. Risk analysis: we do not think TRTT is exposed to risks of public hospital reform or drug tenderings, because most of its sales depend on retail pharmacies instead of hospitals. We recommend investors to be aware of share price fluctuations amid 1) price rises of raw TCM materials and 2) profit-taking of some previous investors after the share price rise 从 2011 年开始, 同仁堂科技的业绩增长就开始加速 2011 年和 2012 年 1-3 季度, 其净 利润分别同比增长 28.6% 和 28.5%, 远高于其 年 7.5% 的年复合增长率 这一重 大转变的直接原因是其 2011 年 4 月推出的管理层激励计划, 我们曾经成功预测了此转变 多重潜力保障其持续高增长 :1) 品牌的力量,2) 丰富的产品组合,3) 药妆品牌的潜力, 4) 涨价潜力,5) 对消费者的教育远,6) 低铺货率改善,7) 同仁堂集团整合,8) 同仁 堂国药分拆上市带来的增长 我们会在未来一系列报告中, 逐一分析这些增长潜力 买入, 目标价 港元 维持基本假设 : 即公司 年净利润的年增速在 30% 以上 预测 2012/13/14 年的 EPS 分别在 RMB0.564/0.734/0.955 公司持续高速增长可见 可期 将目标价上调至 港元, 相当于 30x2013 PE, 买入 低风险 : 由于依靠零售药店渠道而非医院渠道, 没有公立医院改革及药品招标降价风险 不过我们建议投资者留意短期内其股价可能受到以下因素波动 :1) 中医原材料价格的上涨, 2) 有投资者可能因为股价前期上涨而卖出获利 Rating: Buy Upgraded 评级 : 买入 ( 上调 ) 6-18m TP 目标价 : HK$27.50 Revised from 原目标价 : HK$16.20 Share price 股价 : Stock performance 股价表现 HK$ % of return (20.0) (40.0) Feb-12 May-12 Aug-12 Nov-12 Feb-13 HSI Index Change in Share Price 股价变动 TRT Tech (01666 HK) 1 M 1 个月 3 M 3 个月 1 Y 1 年 Abs. % 绝对变动 % Rel. % to HS index 相对恒指变动 % Avg. share price(hk$) 平均股价 ( 港元 ) Source: Bloomberg, Guotai Junan International Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结 收入 股东净利 每股净利 每股净利变动 市盈率 每股净资产 市净率 每股股息 股息率 净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 2010A 1, A 1, F 2, F 2, F 3, Shares in issue (m) 总股数 (m) Major shareholder 大股东 TRT-A ( 同仁堂股份 ) 51.02% Market cap. (HK$ m) 市值 (HK$ m) 12,965.4 Free float (%) 自由流通比率 (%) 48.2% 3 month average vol. 3 个月平均成交股数 ( 000) FY13 Net gearing (%) FY13 净负债 / 股东资金 (%) Net Cash 净现金 52 Weeks high/low (HK$) 52 周高 / 低 / Source.. the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 7

2 Visible improvement since 2011 Growth of Tong Ren Tang Tech (01666 HK, the Company, or TRTT ) has been speeding up since Revenue grew by 22.6% YoY in 2011 and 24.3% YoY in 1-3Q2012, compared to its revenue CAGR of 11.1% in Net profit grew by 28.6% YoY in 2011 and 28.5% YoY in 1-3Q2012, compared to its net profit CAGR of 7.5% in We have successfully predicated the Company s great change, which is mainly attributed to the management incentive scheme launched in Apr The management incentive scheme: much smaller amount, but a good start for The total incentive fund for ~8 senior managements amounts ~RMB3 mn, according to our latest conference call with its management in The amount is much less than the RMB28 mn, or 11% of its net profit in 2011 (the ceiling according to the scheme). We think the arrangement is due to 1) the continuous growth in 2012 (which determines the fund amount in 2013) has been a very important factor for the decision and 2) the Company has tried to maintain a low-profile for the first year. Despite of the small amount, we believe it will be a good start, and the incentive scheme will continue driving its growth. Table-1: Details of the Management Incentive Scheme of TRTT Grade Net profit YoY Growth % appropriated as incentive fund 1 <10% %~15% 1.5% 3 15%~20% 3.0% 4 20%~25% 6.5% 5 25%~30% 11% 6* 30%~40% 15% 7 >40% 18% Source: the Company, Guotai Junan International Note: We think Grade 6 is most attractive and realistic for the Company s management. Great potential for sustainable growth We think TRTT has the following great potential for sustainable growth. In a coming series of reports, each of these potentials will be discussed in details separately. 1. Strength of TRT brand with careful cultivation: customer loyalty. We think that TRT Group and its members, including TRTT, have very high morals. The morals ultimately support the highest quality standards and the respectable brand name of TRT. This is much more important for traditional Chinese medicine industry because 1) consumers have much less knowledge to distinguish good products from bad products than other consumables; 2) it is much more difficult for professionals / regulators to test traditional Chinese medicines than western drugs due to complex ingredients. Scandals of food and medicines industry are more and more popular in China, and we think it is a good opportunity for TRTT to catch more market shares with its carefully cultivated brand name. In a coming report, we will analyze the improving customer loyalty of TRT by introducing Baidu Index ( 百度指数 ) and Taobao Index ( 淘宝指数 ). 2. Rich product mix TRTT has 280 product licenses for medicines, according to SFDA website. Excluding the multi license of some major products such as Liuwei Dihuang Wan ( 六味地黄丸 ), it has over 200 products in total. Of these products, only ~20 major products (as shown in Table-2) are produced routinely. We think any of the rest non-major products may be a good growth driver, if produced and well marketed. We will discuss the potentials of these products in details in a coming report. See the last page for disclaimer Page 2 of 7

3 Table-2: Major Products of TRTT Category First-line products Second-line Products Dihuang Serious ( 地黄系列 ) Liuwei Dihuang Wan ( 六味地黄丸 ) Zhibai Dihuang Wan ( 知柏地黄丸 ) Zhenqi Yishen Keli ( 贞芪益肾颗粒 ) Coldrex ( 感冒药 ) Ganmao Qingre Keli ( 感冒清热颗粒 ) Banlangen Keli ( 板蓝根颗粒 ) Niuhuang JieduPian ( 牛黄解毒片 ) Qiguanyan Wan ( 气管炎丸 ) Ganmao Ruanjiaonang ( 感冒软胶囊 ) Cardiology ( 心血管科 ) Niuhuang Jiangya Pian ( 牛黄降压片 ) Fufang Danshen Pian ( 复方丹参片 ) Yufeng Ningxin Diwan ( 愈风宁心滴丸 ) Oncology ( 肿瘤科 ) Xihuang Wan( 西黄丸 ) Gynaecology ( 妇科 ) Jiawei XiaoyaoWan ( 加味逍遥丸 ) Baihe Gengnian Wan ( 百合更年丸 ) Ruhe NeixiaoYe ( 乳核内消液 ) Neurology ( 神经科 ) Anshen Jiannao Wan ( 安神健脑丸 ) Nourishing ( 保健 ) E-Jiao ( 阿胶 ) Source: the Company, Guotai Junan International Note: Products of Tong Ren Tang Chinese Medicine (TRT-CM, a controlling subsidiary of TRTT) are not listed above and were discussed separately. 3. Great potential of the cosmeceutical products The Beijing Tong Ren Tang WM Dianorm Biotech Co., Ltd (TRT WM) is a JV owned60% by the TRTT, focusing on skincare (cosmeceutical) products which combine liposome technology with modern Chinese medicine. It has about 40 products including lotions, cream, facial and eye masks and liposome skincare products. In 2011, revenue of TRT WM grew by 8.3% YoY to RMB39 million, accounting to 2.0% of its total revenue. Although the revenue contribution of TRT WM is small, we think the TRT skin care products have a great market potential. The bottleneck of this subsidiary is the small investment (only US$3 million) and too conservative marketing strategies. In the future, with capital increase of the both sides, TRT WM may grow faster and become an important growth driver of TRTT. 4. Price increase potential About 50% of TRTT s products are not listed in the National Medical Insurance Category, and are thus not subjected to price regulations. These products account for ~20% of its revenue. Price increase for these products is also a possible growth driver. For example, it increased the retail prices of Angong Niuhuang Wan ( 安宫牛黄丸 ) by 60% and E-Jiao ( 阿胶 ) by 20% in 2012, respectively. Generally, we think the demands for these high-end products are much less elastic, and price increase may not hurt sales volume. Although we do not think TRTT s margins to be improved sharply, because of its high morals and its missions for the society, we believe continuous price increase could well offset price increase of raw materials. 5 Marketing: customer education is not enough. TRTT have maintained low advertisement expenses. In 2010 and 2011, its advertisement expenses were only RMB69 mn and RMB58 mn, or 3~4% of its revenue. We estimates more than half of these expenses are allocated in Beijing local media. As a result, customer education is far not enough for most of its products; especially most of TRTT s sales are via retail pharmacies. In several cases, TRTT has ridden on customer educations from its competitors, such as Liuwei Dihuang Wan ( 六味地黄丸 ) via Jiuzhi Tang( 九芝堂 ), or ridden on some un-paid media reports, such as reports of price increase of Angong Niuhuang Wan ( 安宫牛黄丸 ). But we think more efforts in customer education will help develop TRTT s growth potentials. 6. Current low distribution coverage rate to be improved with China s retail pharmacy industry integration TRTT depends largely on retail pharmacies, which are developed by its distributors. According to our channel check, many independent pharmacies do not sell TRTT s products, and we estimate the distribution coverage rate of TRTT (defined as the number of pharmacies with TRTT products / total number of pharmacies in China) is less than 50%. This rate is expected to be improved with China s retail pharmacy industry integration, to drive TRTT s future growth. See the last page for disclaimer Page 3 of 7

4 7. Perspective from the TRT Group: improving synergies. TRTT is one of the 6 major subsidiaries of TRT Group. In 2011, it accounted for only ~12% of TRT Group s total revenue, and ~20% of TRT Group s total profit (including the consolidated TRT Chinese Medicines). Similar as TRTT, other TRT Group members have also started growing fast in these years. TRTT benefits from the fast growth of its sister companies. For example, 1) TRTT could directly leverage on TRT pharmacy expansions and 2) TRTT could co-market with the products of its sister companies (some retail pharmacies display all TRT brand products together). We will analyze TRTT s opportunities as a member of TRT Group in a coming report. 8. Spin-off of TRT Chinese Medicines TRTT operates its international market via its TRT Chinese Medicines (TRT CM), its 53.09% controlling subsidiary. TRT CM has ~70 retail pharmacies in 12 territories, including Hong Kong, Macau, Malysia, Canada, Indonesia, South Korea, Thailand, Singapore, Cambodia and the United Arab Emirates. According to the Company, revenue of all these international retail pharmacies (excluding those located in Hong Kong) rose by 28% YoY to RMB95 mn in 2011, accounting for 5% of its total revenue. Currently, the major customers are oversea Chinese, but we expect more and more local people will accept Chinese medicine products and it is a great opportunity for TRT CM. Besides, TRT CM s retail network expansion in Hong Kong and production of health products are also two major growth drivers of TRT CM. The spin-off of TRT CM is expectable in 2013, positive for the growth and valuation of TRTT. Low industry risks We are concerned about the risks of healthcare industry in the current healthcare reform: 1) removal of the 15% mark-ups of hospital drug sales and restrictions on hospital briberies may hurt drug sales volume growth; 2) new drug tendering will start in 2013 in many provinces. The risks may be very negative for the fast growth of the industry, and we have downgraded the sector to Underperform. But we do not think TRTT is involved in these risks, because most of sales depend on retail pharmacies instead of hospitals. Valuation and Ratings We maintain our basic assumption that the net profit growth of the Company will be over 30% YoY in , driven by the management incentive scheme and supported to the intrinsic growth potentials. EPS is estimated to be RMB0.564, and for 2012/13/14. With visible and expectable fast growth, we simply value it at 30x2013 PE, or HK$27.50 up from HK$16.20, and upgrade it from Accumulate to Buy. We recommend investors to be aware of share price fluctuations amid 1) the macro economy situation, 2) price rises of raw TCM materials and 3) profit-take of some previous investors after the share price rise, despite TRTT is less affected by those factors. See the last page for disclaimer Page 4 of 7

5 Table-3: SWOT summary of Tong Ren Tang Tech Strengths 1. Famous brand of TRT; 2. Abundant product portfolio of hundred products; 3. Effective incentive scheme for management (since Apr 2011); 4. About 90% of revenue are from OTC drugstores; 5. About 50% of products have no retail price ceilings; 6. Experience in inventory management of raw TCM materials; 7. Increasing self-production portion of raw TCM materials; 8. Favorable policies from Beijing government as the only pharmaceutical company of Beijing SASAC. Opportunities 1. Fast growth of China s TCM industry; 2. Scandals of food and drug safeties may drive consumers to buy products of famous brands; 3. Great market potential in East China, West China and the overseas market; 4. Fast growth of its sister companies and channel integration and synergy among TRT Group. Source: Guotai Junan International Weaknesses 1. About 50% of its products have retail price ceilings; 2. None of the Company s products are exclusive products. 3. Costs of the Company s products are relatively higher than industry average because of higher production standards. Threats 1. Fierce competitions (especially by price strategies); 2. Scandals of its competitors may influence the reputation of TCM industry. Peers Comparisons Company Stock Code Currency Share Price HK listed companies Mkt Cap PE PB ROE (%) (million) 12F 13F 14F 12F 13F 14F 12F 13F Tong Ren Tang Technologies-H HK HK$ , Guangzhou Pharmaceutical-H HK HK$ , Sino Biopharmaceutical HK HK$ , China Shineway Pharmaceutica HK HK$ , The United Laboratories Inte HK HK$ , Sihuan Pharmaceutical Hldgs HK HK$ , Sinopharm Group Co-H HK HK$ , Shanghai Pharmaceuticals-H HK HK$ , China Medical System Holding HK HK$ , Shandong Weigao Gp Medical-H HK HK$ , Simple Average Weighted Average GPM (%) 11 OPM (%) China listed companies Beijing Tongrentang Co-A CH RMB , Harbin Pharmaceutical Grp-A CH RMB , Yunnan Baiyao Group Co Ltd-A CH RMB , Zhangzhou Pientzehuang Pha-A CH RMB , Jiuzhitang Co Ltd-A CH RMB ,202 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Renhe Pharmacy Co Ltd-A CH RMB , Simple Average Weighted Average Source: the Companies, Bloomberg, Guotai Junan International. See the last page for disclaimer Page 5 of 7

6 Financial Statements and Ratios Income Statement (RMB mn) 2010A 2011A 2012F 2013F 2014F Cash Flow (RMB mn) 2010A 2011A 2012F 2013F 2014F Revenue 1,579 1,936 2,367 2,870 3,465 PBT Cost of Sales (817) (999) (1,219) (1,475) (1,781) Changes in working capital (2) (98) 55 (55) (57) Gross profit ,148 1,395 1,684 others Income tax (43) (57) (72) (92) (120) Distribution expenses (353) (402) (479) (570) (656) Net operating cash flow Administrative expenses (146) (185) (225) (250) (275) Operating profit CAPEX (33) (91) (301) (300) (300) others (100) 65 (48) (0) 10 Financial costs- net Net investing cash flow (133) (27) (349) (300) (290) Shares of associates (0) (1) (1) (1) (1) PBT changes in borrowings Income tax (42) (54) (72) (92) (120) Dividends paid (94) (96) (112) (166) (216) Minority Interest (27) (27) (42) (57) (77) Other investing activities 21 (10) Net profit Net financing cash flow (74) 4 (112) (166) (216) EPS Net increase in cash Dividends Cash at bgn of yr DPS Exchanges effect 20 (3) Dividend Yield (%) Cash at end of yr Balance Sheet (RMB mn) 2010A 2011A 2012F 2013F 2014F Ratios 2010A 2011A 2012F 2013F 2014F Cash and equivalent Growth A/C receivables Revenue 20.7% 22.6% 22.2% 21.2% 20.7% Inventory 957 1,328 1,195 1,255 1,380 Net Profit 14.4% 28.6% 30.1% 30.2% 30.1% Other current assets EPS 14.4% 28.6% 30.1% 30.2% 30.1% Total current assets 1,699 2,219 2,325 2,446 2,803 Margins Fixed assets ,168 Gross Margin (%) 48.2% 48.4% 48.5% 48.6% 48.6% Other non-current assets Net Margin (%) 12.5% 13.2% 14.0% 15.0% 16.2% Total assets 2,175 2,818 3,061 3,413 3,977 Operating ratios A/C payables selling expenses ratio 22.3% 20.8% 20.3% 19.9% 18.9% Short-term borrowings Admin expenses ratio 9.3% 9.5% 9.5% 8.7% 8.0% Other current liabilities Inventory days Total current liabilities A/C payable days A/C receivable days Long term borrowing Other non-current liabilities Finacial ratios Total liabilities ,031 Current ratio Net Gearing Net Cash Net Cash Net Cash Net Cash Net Cash Shareholders' equity 1,559 1,719 1,939 2,204 2,550 ROA (%) 9.7% 10.2% 11.3% 13.3% 15.2% Minority interests ROE (%) 13.1% 15.5% 18.1% 20.8% 23.6% Total Equity 1,737 1,939 2,201 2,524 2,946 Valuation Total liability and equity 2,175 2,818 3,061 3,413 3,977 P/B NBV per share (RMB) P/E Source: the Company, Guotai Junan International. See the last page for disclaimer Page 6 of 7

7 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for Shandong Chenming Paper Holdings Limited-H shares (01812) and China City Railway Transportation Technology Holdings Company Limited (08240), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 7 of 7