联邦制药 [3933.HK] 首予覆盖 : 胰岛素业务将带领公司从谷底复苏 虽然市场仍关注联邦制药的中间体和原料药业务表现下滑, 但我们倾向将焦点放在公司具有前途的胰岛素 ( 用于治疗糖尿病 ) 业务 联邦制药作为该市场的先行者, 其很可能在 2015 下半年推出第三代高端胰岛素, 成为第二家能生产该产品的国内制药商 公司的产品组合改善导致其毛利率上升, 加上财务费用率下降, 在这情况下, 我们预测公司的 2015 年及 2016 年核心盈利将分别增长 22.3% 和 24.9% 随着公司的中间体和原料药业务趋向稳定, 以及其胰岛素业务渐入佳境, 我们首次覆盖该公司, 予买入评级, 目标价为 7.25 港元, 代表着 17.7 倍的 2015 年市盈率 投资亮点 买入 收盘价 : 5.53 港元 (2015 年 6 月 10 日 ) 目标价 : 7.25 港元 (+31.1%) 股价表现 中国保健护理行业 胰岛素业务强劲增长 : 联邦制药是国内生产第二代胰岛素的四家厂商之一 目前该市场由跨国企业主导, 但我们认为联邦制药将可夺取市场份额, 因为 1) 其产品价格具有竞争力 ( 较海外产品折价 10-30%); 2) 公司向二三线市场扩张 ; 3) 销售队伍强大 随着公司或在 2015 下半年推出第三代胰岛素产品, 我们预计公司的胰岛素业务收入能在 2015 和 2016 年保持每年 30% 以上的增长 6- 氨基青霉烷酸 (6-APA) 和半合成青霉素的市场龙头 : 联邦制药是目前中国最大的 6-APA 和半合成青霉素制造商 凭借公司的经济规模 自家发电和生产技术, 联邦制药相对其竞争对手有 10% 的成本优势 此外, 相对同业, 联邦制药在控制产量和价格方面有更大灵活性和议价能力 利润率提升 : 我们认为联邦制药的核心净利润率将在 2015/16 年改善至 7.5%/8.7%(2014 年为 6.8%), 主要由于 1) 高利润率产品的收入贡献增加 ; 2) 生产效率提升 ;3) 净利息费用比率下降 予买入评级, 目标价为 7.25 港元 : 我们的目标价是基于贴现现金流模型所得 股份目前的 2015 年市盈率为 13.5 倍, 较其他香港上市的医疗保健公司大幅折让 我们认为, 在联邦制药的业务不断改善和公司推出新胰岛素产品之下, 上述估值差距将缩小 市值 11.609 亿美元 已发行股数 16.269 亿股 核数师 Deloitte 自由流通量 26.5% 52 周交易区间 3.09-6.56 港元 三个月日均成交量 680 万美元 主要股东 宁桂珍 (73.3%) 来源 : 公司, 彭博 吴永泰, CFA 分析员 (852) 3698-6275 截至 12 月底止年度收入 ( 百万港元 ) 核心净利润 ( 百万港元 ) 核心净利润率 (%) 每股核心盈利 ( 港元 ) 百分比变动市盈率 ( 倍 ) 市净率 ( 倍 ) 净资产收益率 (%) EV/EBITDA ( 倍 ) cyrusng@chinastock.com.hk 王志文, CFA 研究部主管 (852) 3698-6317 cmwong@chinastock.com.hk Sources: 来源 : 公司 Company,, 中国银河国际研究部 CGIHK Research 1
The United Laboratories [3933.HK] INITIATE COVERAGE: Insulin business, the silver lining While the market is still focusing on the downside of The United Laboratories (TUL) intermediates and bulk medicines business, we would rather put our emphasis on the company s promising insulin business for diabetes treatment. As an early mover in the sector, TUL has high chance to be the second local manufacturer in launching high-end third generation product in 2H2015. With gross margin improvement from product mix change and declining finance expense ratio, we forecast core net profit to grow by 22.3% and 24.9% in 2015E and 2016E respectively. With the stabilizing intermediates and bulk medicines business, together with the promising insulin business, we are initiating coverage on TUL with BUY recommendation and a price target of HK$7.25, which implies a 2015E PER of 17.7x. Investment Highlights Strong growth from insulin business: TUL is one of the four local manufacturers in China that produces second-generation insulin. While the market is currently dominated by international players, we believe TUL can take market share as a result of 1) competitive pricing (10-30% discount over overseas products); 2) expansion in tier-two & three markets; and 3) a strong sales force. With the potential launch of third generation insulin products in 2H2015, we expect revenue from insulin segment can maintain a growth of over 30% p.a. in 2015E and 2016E. Market leader in 6-APA and semi-synthetic penicillin: TUL is currently the largest manufacturer of 6-APA and semi-synthetic penicillin in China. With its economies of scale, self-generated electricity and manufacturing technology, TUL enjoys a 10% cost advantage vs. its competitors. In addition, the company has more flexibility and bargaining power on production volume and pricing vs. peers. Margin improvement: We believe TUL s core net margin will improve from 6.8% in 2014 to 7.5%/8.7% in 2015/16E, due to 1) increasing contribution from high-margin products, 2) manufacturing efficiency improvements, and 3) declining net interest expense ratio. BUY with a price target of HK$7.25: Our price target is based on our DCF BUY Close: HK$5.53 (Jun 10, 2015) Target Price: HK$7.25 (+31.1%) Price Performance Market Cap Shares Outstanding Auditor US$1,160.9m 1,626.9m Deloitte Free Float 26.5% 52W range China Healthcare Sector 3M average daily T/O Major Shareholding Sources: Company, Bloomberg Cyrus Ng, CFA Analyst (852) 3698-6275 HK$3.09-6.56 US$6.8m Ms Ning Kwai Chun (73.3%) cyrusng@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) 3698-6317 cmwong@chinastock.com.hk Sources: Company, CGIHK Research 2
Key financials Note: the non-operating items and income taxes in 2013 and 2014 was due to the reclassification income of the factory land in Sichuan Source: Company data, CGIHK Research estimates 3
Investment thesis TUL is on the way of transforming to a high-end specialty drug manufacturer TUL mainly engaged in the manufacturing and sale of 1) intermediates; 2) bulk medicine; and 3) finished products. Its products can be simply classified as antibiotics and non-antibiotics. With the successful launch of insulin product line, we hold the view that TUL is transforming from a low-end antibiotics manufacturer to a high-end specialty drug manufacturer. Future growth will be dependent on the development of insulin product line and continuous launch of potential new products. Meanwhile, with the gentle recovery of the antibiotics market, we are not expecting strong growth momentum from the antibiotics intermediates and bulk medicine, but we view them as the cash cow for TUL. TUL to focus on insulin therapy products TUL entered into the diabetes treatment industry in 2011 with the introduction of recombinant human insulin product (second-generation insulin). The company currently has four insulin products with different time of action, which fit well into the needs of patients. Although insulin products only accounted for 3%/6% of total revenue/gross profit in 2014, we are optimistic on its prospect and view this as a milestone for TUL s transformation into a high-end specialty drug manufacturer. The current insulin market is still dominated by major international names such as Eli Lily, Novo Nordisk and Sanofi-Aventis. However, we believe local players such as TUL can break into the market by 1) offering lower pricing, 2) targeting second to third-tier cities; and 3) utilizing their strong sales force. Figure 1: Insulin product portfolio of TUL Product Generic name Description USLIN R Recombinant Human Insulin Injection Fast-acting insulin USLIN N Isophane Protamine Recombinant Human Insulin Injection Intermediate-acting insulin USLIN 50 Premixed Protamine Recombinant Human Insulin Injection (50/50) Premixed injection with 50% recombinant human insulin and 50% isophane protamine recombinant human insulin USLIN 30 Premixed Protamine Recombinant Human Insulin Injection (30/70) Premixed injection with 30% recombinant human insulin and 70% isophane protamine recombinant human insulin 4
Local insulin are generally 15-30% cheaper than overseas products Price advantages over international players: Generally speaking, local insulin products are 10 30% cheaper than those offered by international brand names. While this price difference may seem insignificant compared to over 50% price differences between innovative drugs and generic drugs, insulin therapy is a day to day treatment and the price difference means a significant cost saving for diabetes patients and medical insurance system. We believe this price difference will support TUL in promoting insulin products to the mass market. Figure 2: Price difference between local and overseas insulin products Product Company Price (RMB) Recombinant human insulin Novo Nordisk 67 Dongbao 57 Price premium 17.5% Insulin glargine Sanofi-Aventis 255 Ganlee 200 Price premium 27.5% Insulin detemir Eli Lilly 110 Ganlee 98 Price premium 12.2% Local manufacturers to focus on second and third tier cities; Overseas manufacturers to focus on first tier cities Targeting tier-two/three cities: Due to higher pricing and distribution channel constraints, international players focused more on development in tier-one cities. Local players instead focused on development of tier-two/three cities. According to the International Diabetes Federation (IDF), over 50% of diabetes patients are left undiagnosed in China. We believe the majority of these undiagnosed cases are from rural areas due to insufficient medical coverage and a lack of education. With the continuing urbanization and increasing medical coverage in rural areas, more undiagnosed diabetes patients will receive medication and local manufacturers are well positioned to develop this market. Strong sales force: As of the end of 2014, TUL had around 3,000 sales staff in 28 sales offices in China, significantly larger than its local insulin competitors. With this strong sales force, TUL can engage more in medical practitioner support and patient education, which in turn can help increase brand loyalty to TUL s insulin product lines. Figure 3: Number of sales staff (2014) Company Number of sales staff Tong Hua Dong Bao 774 Wanbang Biopharmaceuticals >1,000 TUL 3,000 Source: Compnay, CGIHK Research 5
Diabetes to become a prominent disease as China becomes wealthier Diabetes mellitus, also known as diabetes, is a chronic disease which occurs when either the pancreas does not secrete enough insulin (Type 1) or when the body does not effectively react towards insulin (Type 2). The lack of insulin or ineffective functioning of insulin leads to an increased blood glucose level and may cause severe complications including heart disease, stroke, kidney failure, foot ulcers and eye damage. 96.3m adults in China have diabetes According to the 2014 data from IDF, 96.3m adults in China have diabetes, of which 51.3m are undiagnosed. With improvements in living standards and income, we believe the number of diagnosed diabetes patients and the prevalence rate will grow considerably. The IDF forecasts that China will have 143m diabetes patients by 2035. Diabetes management is mainly focused on control of the blood glucose level and other risk factors. Type 1 can be treated by insulin injections, while type 2 can first be treated by oral medication. If this proves ineffective, insulin therapy is required. There are three types of insulin available in the market: 1) animal insulin (firstgeneration); 2) recombinant human insulin (second-generation); and 3) human insulin analogue (third-generation). The first-generation is purified porcine and bovine insulin. The US has stopped using first-generation insulin but it has still been used in developing countries due to its low pricing. Second-generation insulin resembles the structure and functions of human insulin and is manufactured by DNA recombinant technology. Third-generation has a modified molecular structure to enhance drug delivery action in human body. 6
TUL to become the second local manufacturer in producing third-generation insulin products Launching third-generation insulin products in 2H2015 After completing the clinical trial for its third-generation insulin product, insulin glargine injections, TUL is waiting for the production permit from the CFDA. The company expects to launch the product in 2H2015. Insulin glargine injection is a third generation long-acting insulin analogue and it consists of microcrystals that slowly release insulin, giving a long duration of action of 18 to 26 hours. Technically speaking, it resembles insulin secretion of non-diabetic pancreatic cells. Beside insulin glargine, TUL has also finished clinical trail of insulin aspart, another third-generation insulin product, in 2014. Insulin aspart is a third-generation fast acting insulin analogue which can be quickly absorbed into the bloodstream and as a result, it starts working in minutes after injection. Currently only Sanofi-Aventis and Ganlee are manufacturing insulin glargine in China. With competitive pricing and its extensive sales force, we believe TUL can gain more market share in the insulin market, with hopes to become the second local company manufacturing third-generation insulin products. This will undoubtedly boost the brand image of TUL and the company provides a complete insulin product range to ride on the shift from second-generation to third-generation insulin products. Competitive landscape Currently the insulin market is dominated by international drug manufacturers - Novo Nordisk, Sanofi-Aventis and Eli Lilly. These companies combined account for over 90% market share in the class 2 and 3 hospital market. For local players, most are able to manufacture low-end first-generation insulin, but only four companies can manufacture second-generation insulin - TUL, Dongbao, Wanbang and Kexing. Currently, Ganlee is the only local manufacturer that manufactures third-generation insulin. Figure 4: CFDA approved insulin products Product Description Manufacturer Animal insulin 1st generation, purified animal insulin extracts N/A International company Local company Wangbang and 12 other companies Recombinant human insulin 2nd generation, human insulin manufactured by recombinant DNA technology Eli Lily, BIOTON, Novo Nordisk Wanbang, TUL, Dongbao, Shenzhen Kexing Insulin glargine 3rd generation, long acting insulin analogue Sanofi-Aventis Ganlee Insulin detemir 3rd generation, long acting insulin analogue Novo Nordisk N/A Insulin lispro 3rd generation, fast acting insulin analogue Eli Lilly Ganlee Insulin aspart 3rd generation, fast acting insulin analogue Novo Nordisk N/A Insulin glulisine 3rd generation, fast acting insulin analogue Sanofi-Aventis N/A Source: CFDA, CGIHK Research 7
Third-generation insulin products have the chance to become the first choice with price decrease with the emergence of local manufacturers in China Third-generation insulin will become the first choice Although first-generation animal insulin is still in use because of its low cost, its usage has been limited due to potential allergic and immune response problems. Secondgeneration insulin does not have unfavorable immune and allergic responses, but still has limitations such as administration timing and potential hypoglycemia responses. Third-generation insulin has the benefits of better control of blood glucose level, flexible administration timing and lower risk of hypoglycemia. However, high pricing is the limitation to third-generation insulin as they are usually 20-50% more expensive than second-generation insulin. With the emergence of more local third-generation products, we believe the price gap between second and third-generation insulin will narrow and as a result, we believe third-generation insulin will eventually become the first choice for insulin therapy. Figure 5: Insulin average daily usage cost Insulin Source: CGIHK Research Daily usage cost (RMB) First generation 2.6-2.8 Second generation 6.0-7.5 Third generation 9.0-10.5 First-generation insulin is still being used in lower-tier cities due to the low cost, but we believe usage will shift to second-generation due to safety concerns. For tier-one cities, we believe usage will shift from second-generation to third-generation due to better effectiveness. In short, we believe first-generation insulin will soon be phased out. Second-generation will continue to grow, but at a slower pace than third-generation. The size of China s insulin market was projected to be around RMB10bn in 2013, and according to TUL s management, the market is expected to grow at an annual rate of 15-20%. In 2013, third-generation insulin accounted for around 45% market share in class 2 and class 3 hospitals, up from less than 30% in 2008. Third-generation insulin is becoming more prominent because of its advantages over second-generation insulin. We therefore believe third-generation insulin market growth will outpace overall insulin market growth. 8
Memantine Hydrochloride another product with high potential TUL launched memantine hydrochloride, a first to market generic drug, in 2014 for the treatment of Alzheimer s disease. According to the company, sales growth of the product was constrained due to the delayed drug tender process. TUL s management expects sales to pick up in 2015 with the completion of the drug tender. Currently, China has 6m patients with Alzheimer s and the market value for drugs treating the disease is around RMB1 bn. There is currently only one memantine hydrochloride product in the market with annual revenue of around RMB100m. With the aging population and increasing awareness of the disease and with appropriate pricing, we believe memantine hydrochloride of TUL can quickly gain market share from the original drug. Both demand and production volume of antibiotics rebounded after the sharp plunge initiated by the Clinical management control on the usage of anti-microbial agents The worst is over for antibiotics Due to the "Clinical management control on the usage of anti-microbial agents" ( 抗菌药 物临床应用管理办法 ) policy implemented in 2H11, both demand and ASPs for antimicrobial products plunged in China. Hospital sales of anti-microbial agents grew at over 20% p.a. with overall hospital drug sales since 2008. However, after the implementation of the policy, anti-microbial agents sales plunged by 0.5% YoY in 2011. Production volume of major semi-synthetic penicillin in China also showed similar trend. Volume dropped 4% YoY in 2011, followed by a 8.1% drop in 2012 and rebounded by 1.9% in 2013. We have already seen some improvements in the antibiotics sales growth in 2012 and 2013. Although we believe the overall antibiotics growth will still be slower than the industry growth, we believe the worst is over for the antibiotics industry. We are expecting a high single digit to low double digit growth for the industry driven by the spread of basic medical care coverage. Figure 6: Hospital antibiotics market Figure 7: Semi-synthetic penicillin production 9
TUL holds around 60% market share for 6-APA TUL consolidated its leading position under adverse market conditions Due to an adverse operating environment and intensified market competition during 2011-2012, the market has undergone a round of consolidation as many market players were forced or chose to exit the market. TUL, as the market leader in 6-APA (an ingredient for penicillin) production and semi-synthetic penicillin, invested aggressively in these years in expanding its manufacturing capacity and therefore consolidated its leading position in 6-APA and semi-synthetic penicillin production. The company s current market share of 6-APA by production volume is around 60%, and its share of semi -penicillin type bulk medicine is over 50%. Figure 8: TUL s 6-APA market share in 2012 Source: Wind, CGIHK Research TUL enjoys around 10% cost advantage over competitors due to its scale Enjoying cost advantages over competitors According to management, TUL is enjoying around a 10% cost advantage over competitors for its 6-APA due to 1) its long-term relationship with corn starch suppliers; and 2) self-generated electricity at its Inner Mongolia plant. Utilization rate for the Inner Mongolia plant is currently at around 70%, and we expect more cost advantages will emerge as utilization ramps up. Shifting towards enzymatic production Amoxicillin traditionally was manufactured chemically. TUL has started upgrading its manufacturing process by adopting enzymatic technology. Enzymatic technology has the advantage of less pollution and higher purity over chemical methods. Currently 40% of TUL s amoxicillin is manufactured by the enzymatic method and the remaining 60% by chemical method. Management guided that TUL would keep this manufacturing ratio as regulatory approval is needed before a customer can change from using chemically manufactured amoxicillin to enzymatic manufactured amoxicillin. In spite of this, we expect more cost savings when more customers are shifting to use enzymatic manufactured amoxicillin. More bargaining power on pricing TUL is the dominant player in 6-APA and semi-synthetic penicillin. Together with its cost advantages over competitors, TUL has more flexibility and bargaining power. It can therefore strategically control the production volume and pricing of 6-APA to balance production volume and margins. 10
6-APA price should have reached the trough Antibiotics becoming the cash cow in a stabilized market China medical practices still rely heavily on antibiotics. Although we see the restriction on usage of antimicrobials as a step in correcting this situation, we still believe there is a long way to go. We expect the worst is over for the antibiotics market and demand and ASP are stabilizing. Although the market is worried that the 6-APA price may continue to decline in the future, we view this as a highly unlikely scenario as (1) the cost of 6-APA of TUL is around RMB120 130 per ton and this should be the lowest cost within the industry due to economy of scale. The current 6-APA ASP level is already close to the breakeven point of smaller manufacturers. (2) TUL is the dominating market leader and should have more bargaining power on ASP. TUL made the most of adverse market conditions to expand its position in the antibiotics market. This business has already become its cash cow, generating stable cash flow for the company, which will allow it to develop new business lines. Figure 9: ASP of 6-APA stabilized (VAT included) 6-APA average ASP: RMB188/kg Source: Wind, CGIHK Research 11
R&D efforts TUL has a R&D team of around 220 research personnel and the team currently has 56 new products under development, with 37 new products are at the pre-clinical stage, three new products are at clinical trials and 16 new products are pending production approval. New products are mainly focused on anti-diabetes, anti-cancer, epilepsy, anti -hepatitis B and antibiotics. Increasing R&D focus to shift from a low-end manufacturer to a high-end manufacturer TUL has started to focus more on R&D in developing finished products since 2011, and the R&D expenses to finished product revenue ratio has stayed over 4% in the last three years. We view this as a positive change for TUL to shift from a low-end generic manufacturer to a high-end innovative drug manufacturer. Figure 10: TUL s R&D pipeline Product pipeline Description R&D progress Insulin glargine injection Diabetes management Pending for production permit Insulin aspart injection Diabetes management Finished clinical trial Insulin detemir injection Diabetes management Pending for clinical permit Tenofovir disoproxil fumarate tablets Anti-viral agent for AIDS and hepatitis B Pending for production permit Levetiracetam tablets Anti-epileptic Pending for production permit Frbuxostat tablets Anti-gout Pending for production permit Tadalafil tablets For treatment of erectile dysfunction Pending for production permit 12
Extensive sales and distribution network TUL s sales and distribution network covers most provinces in China. As of June 30, 2014, the company had around 3,000 sales staff for promoting finished products in China. We believe TUL can rely on this distribution network in promoting its new products. Besides the local distribution network, TUL also exports bulk products to Europe, India, Africa, Middle East, South America and other Asian regions. Figure 11: TUL s sales and distribution network 13
Earnings outlook 2014-2017E core net profit CAGR: 22.5% Insulin revenue to grow by over 30% in 2015E and 2016E Overall revenue to grow 10.5% and 8.4% in 2015E and 2016E Core net profit to grow 22.3% and 24.9% in 2015E and 2016E With improvement in gross margin and reducing net interest expense ratio, we expect core net margin to improve from 6.8% in 2014 to 7.5% and 8.7% in 2015E and 2016E respectively. And therefore, in spite of a relatively slow revenue growth, we expect 2014-2017E core net profit CAGR to be 22.5%. Finished product growth driven mainly by insulin products Due to the restriction usage on antibiotics in China, we only expect a high single digit growth for antibiotics finished products. We expect finished products growth will mainly be driven by the growth of insulin products. We forecast revenue growth of insulin products to be 38.4% and 33.3% in 2015E and 2016E respectively. We have not factored in the impact of expected launch of third-generation insulin products into our forecast yet. As a whole, we believe the finished product revenue growth to be 11.1% and 12.3% for 2015E and 2016E respectively. Stagnant growth of intermediates and bulk medicine For intermediates, we believe the ASP of 6-APA has already reached the bottom and stabilized. With TUL s strategies on reducing external sales volume and increasing bulk medicines and finished products sales volume, we believe revenue growth of intermediates will stay low. For bulk medicines, with the ASP rebound and TUL s strategy in increasing bulk medicines sales volume, we expect revenue growth for bulk medicine to be 13.4% in 2015E. Under our assumption of stable pricing for 2016E and 2017E, revenue growth will slow down to around 6-7%. Revenue to grow with a CAGR of 8.9% between 2014 and 2017E Combining contribution from three business segments, we forecast overall revenue to grow by 10.5% and 8.4% in 2015E and 2016E. We also expect revenue portion from finished products to increase from 34% in 2014 to 36.7% in 2017E. Figure 12: Revenue growth of TUL Figure 13: Increasing portion of finished drugs 14
Figure 14: 2014 segment profit Figure 15: Insulin product revenue Net gearing ratio to drop with reducing CAPEX in coming years Improving gross margin with the improving product mix Due to increasing contribution from high margin finished products and improving manufacturing efficiency of intermediates, we expect gross margin to improve to 39.5% in 2015E and 40.3% in 2016E. Reducing CAPEX with the completion of major expansions After completing an aggressive expansion of the Inner Mongolia plants, we expect the future CAPEX will be mainly for capacity upgrades and maintenance and the CAPEX will stay at around HK$700 800m each year going onwards. Figure 16: Net gearing to go down gradually Figure 17: High gearing ratio of TUL (2014) 15
Net gearing to improve with the CAPEX reduction and strong operating cash flow With the aggressive Inner Mongolia expansion project, the net gearing of the company shot up to over 80% in 2013, making the company one of the most high gearing companies listed in Hong Kong. However, with the completion of Inner Mongolia expansion project, we only expect relatively small CAPEX in coming years for facility upgrades and maintenance and therefore, we expect the net gearing to drop gradually to 65.9% and 51.8% in 2015E and 2016E. Strong operating cash flow: In spite of the challenging operating environment in previous years, TUL has been able to maintain a strong operating cash inflow since its listing in 2007. We believe this strong inflow in cash can help TUL lower its debt level. Figure 18: Core net profit growth of TUL Figure 19: Strong operating cash flow 16
Valuation Initiate coverage with a BUY rating and target price of HK$7.25 We initiate coverage on TUL because of its prospect in insulin business and gentle recovery of the antibiotics business. We value the company at a target price of HK$7.25, which implies an upside of 31.1% from Jun 10 closing price of HK$5.53. Our 5-year DCF model projects a target price of HK$7.25 for TUL with a WACC of 10.1% and terminal growth rate of 3%. Please refer to the following table for a detailed breakdown for our DCF model. Figure 20: DCF valuation for TUL 2014 2015F 2016F 2017F 2018F 2019F HK$m HK$m HK$m HK$m HK$m HK$m Net profit 545 667 833 1,002 1,182 1,411 Depreciation and amortisation 713 673 707 739 774 811 Net interest 272 224 224 218 195 197 CAPEX (912) (800) (700) (750) (800) (850) Change in working capital 194 (500) (170) (180) (128) (226) FCF 812 263 893 1,029 1,222 1,343 Terminal value 19,495 Corporate value 15,462 Debt & Preferred Stock 5,893 Bank deposit and pledged cash 2,218 Non-controlling interest 0 Equity Value 11,787 Number of shares 1,627 Value per share (HK$) 7.25 Risk free rate 3.6% Beta 0.9 Risk premium 8.3% Cost of equity 11.0% Cost of debt 6.0% WACC 10.1% Terminal growth rate 3.0% 17
Figure 21: Sensitivity analysis for TUL TUL is currently trading at a FY15E PER of 13.5x, which is in-line with the 3 year average of 13.6x. As we believe TUL is in the process of transforming from a low-end bulk medicine manufacturer to a high end specialty drug manufacturer, there should be a round of rerating for the company. Figure 22: PER band of TUL 21.5X 17.5X 13.6X 9.7X 5.7X Source: Bloomberg, CGIHK Research 18
Figure 23 Peers valuation Source: Bloomberg, CGIHK Research 19
Investment risks Fluctuation in ASP of intermediates and bulk medicines: As mentioned in previous sections, we believe ASP of intermediates and bulk medicines has already reached the trough level. However, any fluctuation in ASP may bring negative impact to market sentiment. Increasing competition for insulin market: Currently only four local manufacturers can produce second-generation insulin products in China and we expect TUL to be the second local manufacturer in producing third-generation insulin products. There is still limited market competition for the sector. Potential entrance of more local players into the sector may intensify market competitions. Environmental protection issue: Although TUL has invested considerably in environmental protection for its Inner Mongolia plant, it was still being accused of polluting the neighborhoods in previous years. As the government and the general public are becoming more aware of environmental protection issues, TUL may need to invest additional capital to improve its facilities. Slower than expected launch of new products: We believe the insulin product line and other potential new finished products are growth drivers for TUL. Any delay in the launch of these new products may slow down the company growth. Core starch price hike: Corn starch price accounted for around 30% of TUL s manufacturing cost. Any corn starch price hike may have negative impact on the profit of TUL. 20
Company background The United Laboratories was founded in Hong Kong in 1990. It mainly engaged in the R&D, production and sale of antibiotics intermediates, bulk medicines and finished products. The company has also expanded its finished product line to other therapeutic areas like insulin products for diabetes treatment. It was listed on the Hong Kong Stock Exchange in 2007. TUL has five manufacturing plants located in Inner Mongolia, Zhongshan, Zhuhai, Kaiping and Hong Kong. The company has an annual capacity of 21,000 tonnes of intermediates and over 22,000 tonnes of bulk medicines. Figure 24: Production capacity of TUL Products 2014 Intermediate products (tonnes) 6-APA 21,000 T-Octylammouium Clavulanate 720 Bulk medicine (tonnes) Semi-synthetic penicillins type 20,000 Cephalosporins type 1,200 Beta-lactamase inhibitor antibiotics type 1,568 Finished products (m units) Amoxicillin & ampicillin capsules 1,540 Amoxicillin granules 161 Beta-lactamase inhibitor antibiotics (bottles) 143 Figure 25: Manufacturing plants of TUL 21
Senior management Mr. Tsoi Hoi Shan is an executive director and the Chairman of the Company. Mr. Tsoi joined the Group in 2000 as a supervisor of the quality control department and was responsible to supervise the production process at the Hong Kong Yuen Long Plant and ensure that it was in compliance with the Good Manufacturing Practice. Mr. Tsoi graduated from Tongji Medical University with a Bachelor degree in Medicine and a Bachelor degree in Surgery in 1998. Mr. Tsoi is the son of Mr. Choy Kam Lok, former Chairman of the Company, and the brother of Ms. Choy Siu Chit, an executive director of the Company. Mr. Leung Wing Hon is an executive director, the Vice-Chairman, the Chief Financial Officer and Company Secretary of the Company. Mr. Leung is a fellow member of the Hong Kong Institute of Certified Public Accountants, an associate member of the Association of International Accountants and a fellow member of The Taxation Institute of Hong Kong. He holds a Bachelor of Accountancy degree from University of Bolton and Postgraduate Certificate in Business Administration from University of Leicester in the United Kingdom respectively. Mr. Leung had previously held the position of accounting manager in a subsidiary of Chinney Investment Ltd., a company whose shares are listed on the Main Board of the Stock Exchange. Mr. Leung has over 20 years experience in accounting, finance management and business administration. Mr. Leung joined the Group in 1997 and was responsible for overseeing the financial matters of the Group. Ms. Choy Siu Chit is an executive director of the Company. Ms. Choy joined the Group in 1990. She handled the Drug Master File submission relating to the Group s amoxicillin bulk medicine with the FDA pursuant to which the Group became the holder of Drug Master File Type II (no. DMF 15377) relating to its amoxicillin bulk medicine in 2001. Ms. Choy is a director of Mighty Brokerage (Asia) Limited, which principally provides brokerage and securities trading services in Hong Kong. She is the daughter of Mr. Choy Kam Lok, former Chairman of the Company, and the sister of Mr. Tsoi Hoi Shan, an executive director and Chairman of the Company. Mr. Fang Yu Ping is an executive director of the Company and a vice president of the Group. Mr. Fang graduated from the Medical School of Southeast University in the PRC (formerly known as Nanjing Railway Medical School), with a bachelor s degree in medicine in 1986. After graduation, he served as a teaching staff member of the School for 8 years. Mr. Fang joined the Group in 1995 and was promoted to vice president of the Group in 2008. He is the general manager of China Sales Division. Ms. Zou Xian Hong is an executive director and a vice president of the Group. Ms. Zou graduated from Nanjing Medical College of China Pharmaceutical University in 1984 and obtained her Executive Master of Business Administration from Hunan University in 2005. Ms. Zou has over 20 years experience in the PRC pharmaceutical industry. Ms. Zou was employed as a teacher at the Hunan Medical Middle School from 1988 to 1993 prior to joining the Group in 1994. She has been responsible for the sales management of the Group. Ms. Zhu Su Yan is an executive director of the Company and a vice president of the Group. Ms.Zhu graduated from the Medical School of Southeast University in the PRC,with a bachelor of medicine and surgery degree in 1988. She was granted a degree of Executive Master of Business Administration from Business School of Nanjing University in 2005. Ms. Zhu worked in Nanjing Gulou Hospital as a neurosurgeon from 1988 to 1993, and joined Pfizer in 1994. She joined the Group in early 1995. Ms. Zhu has extensive experience in the sales and marketing of pharmaceutical products in the PRC and is principally responsible for the sales and marketing of the Group s products in the PRC. 22
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