德银中国医疗健康行业个股上海制药制造企业主导的生产线20171101DeutscheBankShan

1November2017HealthCareShanghaiPharmaHealthCareHealthCareResultsAsiaChinaIndustryShanghaiPharmaDate1November2017DeutscheBankMarketsResearchIn-linequarterledbymanufacturingbusinessSolidOCFgenerationin3Q17ShanghaiPharmareportedrevenue/coreprofitofRMB33.3bn/685min3Q17,representingYoYgrowthof7.9%/0.5%respectively,moderatingfrom1H17growthof10%/11%.Growthinthedistributionarmwasdraggeddownbytwoinvoicepolicyandbroadreformheadwinds,whileanemicprofitgrowthwasduetothehighbaselastyearfromJVcontributions.Themanufacturingsegmentremainedthebrightspotwith22%growthin3Q17,or11%onanorganicbasis.ContributionsfromVitacoandacquiredassetsin3Q17wereapproximatelyRMB280mandRMB65m,respectively.WehighlightthesolidcashgenerationabilitiesofSPH,withRMB1.1bnOCFinflowin3Q17,comparedwithRMB850minflowin3Q16.WemaintainBuyonSPH-Honitsvaluationandgrowthoutlook;HoldforSPH-A.Distributiondecelerated,whilemanufacturingcontinuestodeliverPharmadistributionregisteredagrowthdecelerationin3Q17,registeringYoYgrowthof-9.6%,comparedto10%/16%in1H17/2016.Onthecontrary,organicgrowthatthemanufacturingarmacceleratedto11%YoYin3Q17,comparedto7%/5%in1H17/2016.Executivesexpecttocaptureopportunitiesarisingfromtheoutflowofprescriptiondrugs,supportedbythederivativebusiness,includingcommercialhealthcareinsuranceandYiyaoe-commerce.MarginexpansiondrivenbyhigherDScontributionsGM/OPMincreasedto12.1%and3.9%in3Q17,comparedto11.3%/3.4%in3Q16.GrossmarginexpansionwasdrivenbyagrowthaccelerationatDSandalowercontributionfromtheIDSsegment.OPMimprovementsarelargelyattributedtolowerselling/marketingexpensesandimprovingoperationalefficiency.Goingforward,managementexpectsfinancingcoststotrendupwardslightly,onthebackofanupwardinterestraterevisioncycle.ARandinventorydayswerelargelystable,registering97/51daysin3Q17,comparedwith96/49daysin3Q16.APdaysincreasedfrom83daysin3Q16to100daysthisquarter,suggestingenhancedoperationalliquiditydespitereformchallenges.MaintainingPTofHKD24.5forSPH-HandRMB21.3forSPH-A;risksWederiveourtargetpricefrom16.5x2018EEPS.WebelieveSPHdeservesaslightpremiumforitshighearningsvisibilityandfutureacquisitionopportunities,comparedtopeerstradingat15xwith12%growthin2018E(vs.the10%weJackHu,PhDResearchAnalyst+852-22036208MeganXuResearchAssociate+852-22035928CompaniesfeaturedShanghaiPharmaceuticals(2607.HK),HKD20.15Buy2016A2017E2018EP/E(x)13.916.114.7EV/EBITDA(x)9.17.86.8Price/book(x)1.31.41.3ShanghaiPharmaceuticals(601607.SS),CNY25.02Hold2016A2017E2018EP/E(x)15.623.621.5EV/EBITDA(x)11.111.410.0Price/book(x)1.72.01.9Source:DeutscheBankDeutscheBankAG/HongKongDeutscheBankdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.DISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)083/04/2017.THECONTENTMAYNOTBEDISTRIBUTEDINTHEPEOPLE’SREPUBLICOFCHINA(“THEPRC”)(EXCEPTINCOMPLIANCEWITHTHEAPPLICABLELAWSANDREGULATIONSOFPRC),EXCLUDINGSPECIALADMINISTRATIVEREGIONSOFHONGKONGANDMACAU.Distributedon:01/11/201705:51:07GMT0bed7b6cf11c1November2017HealthCareShanghaiPharmamodelforSHPharma).Upside/downsiderisksincludepricecuts,M&AprogressandASPerosioninflagshipproducts.Page2DeutscheBankAG/HongKong1November2017HealthCareShanghaiPharma3Q17recapWehighlightthefollowingkeyupdatesduring3Q17:■Impactoftwo-invoicesystem:ManagementexpectsthegradualimplementationtocontinuetoexertpressureonitsIDSsegment,whiletheDSbusinessesarelikelytoenjoyabove-industrygrowthandfurthermarginexpansion.WeestimatethenetlosstoitsIDSbusinesscouldbeclosetoRMB10bninFY2018,asreformimplementationaccelerates.Nevertheless,GMislikelytocontinuetotrendhigherasthepercentageofDSincreasesinthenextfewquarters.WeremindinvestorsthatDS/IDSremainsteadyatc.70%/30%,respectively.■Distribution:DSdeliveredsignificantoutperformancevs.IDSinprovinceswithpolicyimplementation.Accordingtothecompany,itachieved8%+/14.7%/24.3%inAnhui/HunanandShaanxiprovincesrespectively.ForAnhuiinparticular,DSgrowthstoodabove8%whileIDSrecordedonly4.5%duringthesameperiod.Intheaforementionedthreeprovinces,SPHachievedmarketshareexpansionasaresultofafavorablepolicy.■Manufacturingbusiness:SHPharmaachievedorganicgrowthaccelerationinitsmanufacturingfranchiseat11%/7%/5%in3Q17/1H17/2016,respectively.Notably,salesfromVitacoregisteredRMB280min3Q17,whiletwomoreacquisitionsfromGansuandTianjingeneratedRMB65mtothetopline.■OnM&A:ShanghaiPharmaisactivelyreviewingfavorabletargetsforacquisitions,withthefollowingselectioncriteria:1)anexpandingfootprintinpreviouslynon-coveredregions;2)companieswithacompetitiveedgeinspecificdiseaseTA.Onoverseasacquisitions,SHPharmawillfocusmainlyoncompanieswithspecialtypharma,patenteddrugsorproductswithhighentrybarriers.■Geographicalbreakdown:Zeromark-uppolicyinBeijingreducedoverallASPby9-10%duringApr-Sep17,andvolumegrowthstoodatapproximately10%,maintainingflatYoYgrowthforBeijingrevenue.Executivesbelievethatthemajorityofthenegativeimpactisalreadyreflectedinthefirstfewmonths.Goi