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GS_China_Healthcare

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GS_China_Healthcare

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     November 26, 2010

     China: Healthcare

     2011 Outlook: Rivalry in third terminal market; Initiate CMS with Buy (CL), lift Wuxi to Buy

     20+% growth continues, policy change is key

     We expect the sector to post a sustained 24% CAGR during China??s 12th 5-Year Plan. We see three major themes in 2011 and favor firms with substantial exposure in third terminal markets, and names with consolidation potential.

     Theme 3: Supply chain consolidation to improve industry efficiency

     We expect to see accelerated M&A activity in the drug supply chain, boosted by government commitment to cut distribution layers to improve industry efficiency. Meanwhile, competition in the third terminal market could lead to product-driven M&As, followed by IPOs.

     SUMMARY OF RATING CHANGES

     Price Pricing Rating (19-NovCurr. 2010) CMS 0867.HK Buy * 5.1 HKD WuXi WX Buy 17.3 USD Huahai 600521.SS Buy 18.2 CNY Nepstar NPD Sell 3.6 USD BJ SL 002038.SZ Sell 61.0 CNY * The stock is on our regional conviction list Source: Factset, Gao Hua Securities Research estimates Name Ticker 12m TP 6.6 22.1 21.9 2.7 44.7 Potential Upside/ Downside 30% 28% 20% -25% -27%

     Theme 1: Rising quality standards coupled with further price cuts

     We expect policies to continue to lean toward medical cost containment, i.e. drug price cuts, and control on total treatment cost by designing standard protocols for common disease, e.g. the DRG (Diagnosis-Related Group). We believe the new GMP implementation & the 2010 Pharmacopoeia are top priorities to ensure drug quality.

     OUR OFF-SHORE COVERAGE VALUATION PREMIUM

     Prem./disc. (%) Coverage Avg. P/E (X) 3 yr avg prem MSCI China P/E (X) 1 yr avg prem

     100% 80% 60% 40% 15X 20% 10X 5X 0X Nov-07 0% -20% May-08 Nov-08 May-09 Nov-09 May-10 -40% Nov-10

     Buys: Wuxi/CMS/Shineway/Huahai/Kehua We initiate on CMS with a Buy (CL) on its leading

     position in the 3rd-party drug promotion market, and strong 10E-12E EPS CAGR of 37% thanks to its niche market position. We U/G WX to Buy, as it enters a stable growth period in the next 2 years by dint of its substantial capex in 08-09. We reiterate Buy on Kehua, Shineway, Huahai (off CL), and revise their 12-m TPs by -9% to 38%. We D/G Beijing SL to Sell on stretched valuation and worsening fundamentals. We D/G

    Nepstar to Sell on concerns over weaker earnings prospects. This report transfers primary coverage of Nepstar to Wei Du from Joshua Lu.

     30X 25X 20X

     Theme 2: Growing third terminal market

     We see rising growth contribution from China??s grassroots hospital and rural (third terminal) market, as government continues to rationalize EDL and its implementation. We expect strong growth in sales of antibiotics, cardiovascular, diabetes and cancer-related drugs in the rural market.

     Wei Du, Ph.D +86(21)2401-8928 wei.du@ghsl.cn Beijing Gao Hua Securities Company Limited

     Source: Datastream, Goldman Sachs Research estimates, Gao Hua Research estimates.

     Risks: Policy uncertainty, substantial price cuts and currency fluctuation are major downside risks.

     The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to

    www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

     The Goldman Sachs Group, Inc.

     Global Investment Research

     November 26, 2010

     China: Healthcare

     Table of contents

     Executive summary: Consolidation, acquisition, and operating efficiency drive growth Snapshot: Changes in ratings, target prices, and EPS estimates Industry overview: Policy changes in the spotlight as healthcare reform enters 2nd year Key themes: (1) Quality standard up, prices down; (2) ??Third terminal?? market boom; and (3) Consolidation of the leaders CMS (0867.HK, Buy): Initiate with Buy (CL), on strong commercial channel/product mix Director??s Cut valuation cross-checked with P/B vs. ROE and PEG methodology Financial analysis: margin expansion driven by improving operational efficiency Huahai (600521.SS, Buy): Off CL, maintain Buy for rich pipeline and global partnerships WuXi PharmaTech (WX, Buy): Prior investment to bear fruit in 2011, add to Buy Nepstar (NPD, Sell): Weak fundamentals amid policy headwinds/cost pressure, add to Sell Beijing SL (002038.SZ, Sell): Stretched valuation against softening growth, add to Sell Special

    disclosure Reg AC 3? 4? 8? 8? 12? 18? 23? 25? 27? 32? 34? 40? 40?

     EXPECTED NEWS FLOW/EVENTS/POLICY ANNOUNCEMENT DATE DATE

     February, 2011 February, 2011 2011 Early 2011

     EVENT

     4Q earnings for Nepstar 4Q earnings for WuXi 4Q earnings for Huahai and its contract performance Price cutting policy to be laid out

     COMMENT

     Essential to assess the environment in which retail pharmacies operate Confirm the regained growth momentum post previous years?? capital investment Keep a watch on contract fulfillment status of Huahai??s international cooperation Expected to be released in 2010, but has been delayed several times

     Source: Company data, Goldman Sachs Research estimates.

     The prices in the body of this report are based on the market close of November 19, 2010, unless specified otherwise. We??d like to thank Li Yu for his contribution to this report.

     Goldman Sachs Global Investment Research

     2

     November 26, 2010

     China: Healthcare

     Executive summary: Consolidation, acquisition, and operating efficiency drive growth

     We highlight China??s healthcare sector outlook and 3 key themes in this report. We believe drug price cuts and rising quality standard are the main theme in 2011. We think the industry earnings growth will largely stem from growth of the ??third terminal?? market and industry consolidation. We therefore broaden our coverage universe by initiating on CMS (0867.HK), China??s largest third party distribution company, with a Buy rating and add it to our Conviction list to replace Huahai (off Conviction List but retain Buy). We believe CMS offers the highest earnings upside in our coverage universe, with 37% EPS CAGR from 2010E-2012E, through product acquisition and network expansion.

     Exhibit 1: Coverage group valuation comparison

     Company Ticker Rating M.cap ($bn) Price 2010/11/19 12-m Target Price Potential Upside/ Downside EPS (Reporting Currency) 10E 11E 12E P/E (X) 11E Implied P/E (X) 11E EPS CAGR 10-12E P/B (X) 11E EV/ EBITDA (X) 11E ROE 11E Gross Margin 11E EBIT Margin 11E Net CROCI Margin 11E 11E

     Existing A-share Coverage Huahai Kehua Baiyao Hisun Hepalink E-Jiao Tasly Hengrui NHU Beijing SL CMS Shineway Sinopharm GZ pharm CP Weigao Wuxi Mindray Simcere Nepstar Average Median 600521.SS 002022.SZ 000538.SZ 600267.SS 002399.SZ 000423.SZ 600535.SS 600276.SS 002001.SZ 002038.SZ 0867.HK 2877.HK 1099.HK 0874.HK 1093.HK 1066.HK WX MR SCR NPD Buy Buy Neutral Neutral Neutral Neutral Neutral Neutral Sell Sell Buy * Buy Neutral Neutral Sell Sell Buy Neutral Neutral Sell 0.8 1.5

    6.8 2.7 8.9 4.5 3.2 6.6 2.6 2.2 0.8 2.8 8.4 1.1 0.9 5.1 1.2 3.0 0.7 0.4 3.4 2.6 CNY 18.2 CNY 19.2 CNY 64.9 CNY 39.9 CNY 144.3 CNY 49.7 CNY 42.1 CNY 60.6 CNY 26.7 CNY 61.0 HKD 5.1 HKD 25.6 HKD 29.4 HKD 9.7 HKD 4.4 HKD 18.7 USD 17.3 USD 27.8 USD 10.6 USD 3.6 21.9 22.9 74.3 41.4 146.3 49.8 38.1 49.5 20.20 44.7 6.6 30.3 30.0 8.7 3.7 15.60 22.1 30.0 11.3 2.7 20% 19% 15% 4% 1% 0% -10% -18% -24% -27% 30% 18% 2% -10% -15% -17% 28% 8% 7% -25% 1% 2% 0.35 0.53 1.45 0.65 3.37 0.98 0.81 1.16 1.36 1.24 0.02 0.97 0.56 0.37 0.44 0.38 1.22 1.42 3.01 0.18 1.17 0.98 0.58 0.68 1.86 0.83 4.60 1.20 1.02 1.45 1.41 1.46 0.03 1.22 0.74 0.46 0.30 0.48 1.09 1.62 3.65 0.42 1.46 1.14 0.90 0.82 2.36 1.16 3.28 1.35 1.17 1.75 1.55 1.64 0.04 1.46 0.95 0.51 0.53 0.57 1.45 1.83 5.10 0.51 1.58 1.40 31 28 35 48 31 41 41 42 19 42 20 18 34 18 15 33 16 17 19 58 30 31 37 34 40 50 32 42 37 34 14 31 25 21 35 16 13 28 20 18 21 43 30 32 60% 25% 28% 33% -1% 17% 20% 23% 7% 15% 37% 23% 30% 17% 10% 23% 9% 14% 30% 66% 23% 21% 5.4 7.5 8.3 4.4 5.8 11.3 9.0 9.6 4.7 9.3 3.3 4.6 4.2 1.9 1.1 7.4 2.7 3.0 1.7 1.3 5.2 4.6 28 24 27 34 24 36 30 30 11 35 13 12 14 19 6 36 10 11 10 19 20.9 21.3 19% 28% 26% 9% 20% 28% 22% 27% 27% 26% 18% 28% 13% 10% 8% 25% 18% 19% 9% 2% 19% 19% 41% 55% 34% 29% 44% 56% 32% 82% 52% 79% 57% 69% 8% 27% 23% 54% 37% 56% 82% 48% 48% 46% 14% 39% 12% 5% 38% 27% 11% 27% 41% 64% 27% 42% 4% 5% 7% 25% 19% 24% 11% 1% 23% 21% 19% 35% 10% 7% 33% 27% 9% 22% 30% 63% 22% 38% 2% 7% 6% 33% 18% 23% 9% 2% 21% 21% 21% 68% 59% 12% 99% 118% 24% 44% 33% 50% 43% 94% 28% 8% 13% 28% 34% 45% 14% 6% 46% 39%

     Existing H-share Coverage

     Existing US listed-share Coverage

     * denotes stock is on our regional Conviction list. For important disclosures, please go to http://www.gs.com/research/hdge.html.

     Source: Company data, Factset, Gao Hua Securities Research estimates.

     Goldman Sachs Global Investment Research

     3

     November 26, 2010

     China: Healthcare

     Snapshot: Changes in ratings, target prices, and EPS estimates

     We are using EV/GCI vs. CROCI/WACC-based valuation methodology for stock under coverage. The Val-ratio has shifted from 1.13 to 1.23 for off-shore companies with the addition of CMS (0867.HK), Nepstar (NPD) and the inclusion of WuXi PharmaTech (WX) back into our off-shore comparison universe. The Val-ratio altered from 2.30 to 2.40 for our A-share stocks under coverage. Our changes in TP are a result of the change in Val-ratio (due to comparison group change) and changes in EPS estimates. Exhibit 2: Summary of changes in our ratings and Director??s Cut-based 12-month target prices

     Company A-share Huahai Kehua Baiyao Hisun Hepalink E-jiao Tasly

    Hengrui NHU Beijing SL HK Listed CMS Shineway Sinopharm GZ Pharm CP Weigao US listed WuXi Mindray Simcere Nepstar WX MR SCR NPD 1.2 3.0 0.7 0.4 Buy Neutral Neutral Sell Neutral Neutral Neutral Neutral USD USD USD USD 17.3 27.8 10.6 3.6 22.1 30 11.3 2.7 16.0 27.3 8.5 3.3 38% 10% 33% -18% 28% 8% 7% -25% 1.09 1.62 0.55 0.06 16 17 19 58 20 18 21 43 0867.HK 2877.HK 1099.HK 0874.HK 1093.HK 1066.HK 0.8 2.8 8.4 1.1 0.9 5.1 Buy * Buy Neutral Neutral Sell Sell (n.a.) Buy Neutral Neutral Sell Sell HKD HKD HKD HKD HKD HKD 5.1 25.6 29.4 9.7 4.4 18.7 6.6 30.3 30 8.7 3.7 15.6 (n.a.) 25.5 29.8 6.3 3.3 14.15 (n.a.) 19% 1% 38% 12% 10% 30% 18% 2% -10% -15% -17% 0.26 1.42 0.87 0.54 0.30 0.57 20 18 34 18 15 33 25 21 35 16 13 28 600521.SS 002022.SZ 000538.SZ 600267.SS 002399.SZ 000423.SZ 600535.SS 600276.SS 002001.SZ 002038.SZ 0.8 1.5 6.8 2.7 8.9 4.5 3.2 6.6 2.6 2.2 Buy Buy Neutral Neutral Neutral Neutral Neutral Neutral Sell Sell Buy * Buy Neutral Neutral Neutral Neutral Neutral Neutral Sell Neutral CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY 18.2 19.2 64.9 39.9 144.3 49.7 42.1 60.6 26.7 61.0 21.9 22.9 74.3 41.4 146.3 49.8 38.1 49.5 20.2 44.7 24.1 20.3 62.6 40.9 143.1 39.0 33.5 43.8 17.73 41.1 -9% 13% 19% 1% 2% 28% 14% 13% 14% 9% 20% 19% 15% 4% 1% 0% -10% -18% -24% -27% 0.58 0.68 1.86 0.83 4.60 1.20 1.02 1.45 1.41 1.46 31 28 35 48 31 41 41 42 19 42 37 34 40 50 32 42 37 34 14 31 Ticker Market cap

     (USD bn)

     Rating New Old

     Pricing currency

     Price

     (as of 11/19)

     TP New Old Chg (%)

     Potential Up/ Downside

     EPS 11E

     (Pricing currency)

     Current 11E P/E

     (X)

     TP Implied 11E P/E

     (X)

     * On our Conviction List. For important disclosures, please go to http://www.gs.com/research/hedge.html.

     Source: Company data, Factset, Gao Hua Securities Research estimates.

     Goldman Sachs Global Investment Research

     4

     November 26, 2010

     China: Healthcare

     Exhibit 3: Summary of changes to our 2010E-2012E EPS forecasts

     Company A-share Huahai Kehua Baiyao Hepalink Hisun E-jiao Tasly Hengrui Beijing SL NHU HK Listed CMS Shineway Sinopharm GZ Pharm CP

    Weigao US listed WuXi Simcere Mindray Nepstar WX SCR MR NPD 1.2 0.7 3.0 0.4 Buy Neutral Neutral Sell USD CNY USD CNY 1.22 3.01 1.42 0.18 1.22 2.28 1.42 1.03 0% 32% 0% -82% 1.09 3.65 1.62 0.42 1.08 3.00 1.62 1.22 1% 22% 0% -66% 1.45 5.10 1.83 0.51 1.42 4.44 1.83 1.51 2% 15% 0% -66% 0867.HK 2877.HK 1099.HK 0874.HK 1093.HK 1066.HK 0.8 2.8 8.6 1.1 0.9 5.2 Buy * Buy Neutral Neutral Sell Sell USD CNY CNY CNY HKD CNY 0.02 0.97 0.56 0.37 0.44 0.38 (n.a.) 0.93 0.56 0.36 0.44 0.38 (n.a.) 5% 0% 4% 0% 0% 0.03 1.22 0.74 0.46 0.30 0.48 (n.a.) 1.15 0.78 0.41 0.29 0.49 (n.a.) 6% -4% 13% 1% 0% 0.04 1.46 0.95 0.51 0.53 0.57 (n.a.) 1.36 0.98 0.44 0.53 0.56 (n.a.) 7% -4% 16% 1% 2% 600521.SS 002022.SZ 000538.SZ 002399.SZ 600267.SS 000423.SZ 600535.SS 600276.SS 002038.SZ 002001.SZ 0.8 1.5 6.9 8.7 2.7 4.4 3.2 6.7 2.3 2.7 Buy Buy Neutral Neutral Neutral Neutral Neutral Neutral Sell Sell CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY 0.35 0.53 1.45 3.37 0.65 0.98 0.81 1.16 1.24 1.36 0.36 0.53 1.37 3.37 0.65 0.90 0.80 1.16 1.24 1.36 -4% -1% 6% 0% 0% 9% 1% 0% 0% 0% 0.58 0.68 1.86 4.60 0.83 1.20 1.02 1.45 1.46 1.41 0.61 0.68 1.77 4.60 0.83 1.08 0.98 1.45 1.46 1.40 -5% 0% 5% 0% 0% 10% 4% 0% 0% 0% 0.90 0.82 2.36 3.28 1.16 1.35 1.17 1.75 1.64 1.55 0.95 0.82 2.26 3.28 1.16 1.13 0.92 1.75 1.63 1.55 -5% 0% 4% 0% 0% 19% 26% 0% 1% 0% Ticker Market cap (USD bn) Rating Reporting currency EPS 2010E New Old Chg (%) New EPS 2011E Old Chg (%) New EPS 2012E Old Chg (%)

     *On our Conviction List. Priced as of November 19, 2010. For important disclosures, please go to

    http://www.gs.com/research/hedge.html

     Source: Company data, Factset, Gao Hua Securities Research estimates.

     Goldman Sachs Global Investment Research

     5

     November 26, 2010

     China: Healthcare

     Exhibit 4: Reasons for changes to our 12-month target prices and estimates

     Sales est. revisions Company Kehua (002022.SZ) 10E 11E 12E EPS est. revisions 10E 11E 12E Reasons for EPS and revenue changes We trim our revenue forecast for 2010E-2012E by 0-1% to reflect lower-than-expected triple viral PCR detection product sales due to lower than expected SFDA approval. Accordingly, we lower our earnings estimates by 0-1%. Reasons for change in Valuation and target prices We revise Kehua's DC-based 12-month target price to Rmb22.9 (from Rmb20.3) to reflect changes in our EPS estimates and the sector's average valuation multiple. The new target price implies 34X 2011E P/E (vs current 28X). Key risks: Further pricing pressure in biochemistry reagent due to the rising competition is a major downside risk. We raise Baiyao's DC-based 12-month target price to Rmb74.3 (from Rmb62.6) to reflect changes in

    our earnings estimates and the sector's average valuation multiple. Given the resilient nature of the stock to the recent NDRC pricing measure, we applied a 25% valuation premium (1-yr historical average) to the sector's average valuation multiples. The revised target price implies 40X 2011E P/E (vs current 35X). We believe it is fairly valued at the price range and maintain Neutral rating. Key risks: Price hike of Sanqi raw material is our major downside risk. Better-than-expected sales of Baiyao healthcare products are major upside risk. We revise Hisun's DC-based 12-month target price to Rmb41.4 (from Rmb40.9) to reflect the sector's average valuation multiple. The revised target price implies 50X 2011E P/E (vs current 48X). Key risks: Under-utilization of ramped-up capacity for FDF exports and worse-than-expected growth in oncology products is a major downside risk. Better-thanexpected OEM and sales of Tacrolimus is major upside risk. We fine-tune Hepalink's DC-based 12-month target price to Rmb146.3 (from Rmb143.1) to reflect change in Val-ratio. Current P/E is 31X, while implied P/E is 32X. Key risks: Fluctuation of heparin price is a major risk on both sides.

     -1%

     0%

     0%

     -1%

     0%

     0%

     Yunnan Baiyao (000538.SZ)

     1%

     1%

     1%

     6%

     5%

     4%

     We raise our sales estimates by 1% to reflect better than expected sales of toothpaste in 2010E-2012E. Our 4-6% earnings revision for 2010E-2012E reflects the impact of top line adjustment and margin improvement due to changes in product mix.

     Hisun (600267.SS)

     0%

     0%

     0%

     0%

     0%

     0%

     Our revenue and EPS estimates are unchanged

     Hepalink (002399.SZ)

     0%

     0%

     0%

     0%

     0%

     0%

     Our revenue and EPS estimates are unchanged

     Dong-E E-Jiao (000423.SZ)

     -4%

     -10%

     -14%

     9%

     10%

     19%

     We raise our DC-based 12-month target price to Rmb49.8 (from Rmb39) to reflect We cut revenue forecast by 4-14% to reflect slower growth distribution changes in earnings estimates and the sector's average valuation multiple. The new business and raise our earnings estimates by 9-19% for 2010E-2012E target price implies 42X 2011E P/E (vs current 41X). Key risks: Limited supply of E-Jiao to reflect additional 10% price hike in E-Jiao products and higher gross blocks due to a shortage of raw materials, and pricing pressure from competition are margin due to changes in product mix. major downside risks. Better-than-expected E-Jiao price hike is our upside risk. We raise our revenue forecast by 1-5% for 2010E-2012E and our earnings estimates by 1-26% for 2010E-2012E to reflect stronger than expected sales of Cardio-tonic pills and Nourishing Blood & Cleaning Brain Granule, both are high gross margin products. We revise our DC-based 12-month target price to Rmb38.1 (from Rmb33.5) to reflect changes in earnings estimates and the sector's average valuation multiple. This new target price implies 37X 2011E P/E (vs current 41X). Key risks: Upside: Better-thanexpected sales of TCM injections; Downside: Slower growth in secondary product line. We revise Hengrui's DC-based 12-month target price to Rmb49.5 (from Rmb43.8) to reflect changes in sector's average valuation multiple. Our revised target price implies 34X 2011E P/E (vs current 42X). Key risks: Margin pressure due to the recent NDRC pricing measures is our major downside risk. Softer-than-expected pricing cut policy is the major upside risk. We revise NHU's DC-based 12-month target price to Rmb20.2 (from Rmb17.7) to reflect changes in the sector's average valuation multiple. The revised target price implies 14X 2011E P/E (vs current 19X). Key risks: Sharp increase in Vitamin E and A prices are our upside risk.

     Tasly (600535.SS)

     0%

     1%

     5%

     1%

     4%

     26%

     Hengrui (600276.SS)

     0%

     0%

     0%

     0%

     0%

     0%

     Our revenue and EPS estimates are unchanged

     NHU (002001.SZ)

     0%

     0%

     0%

     0%

     0%

     0%

     Our revenue and EPS estimates are unchanged

     Source: Company data, GS/Gao Hua Securities Research estimates.

     Goldman Sachs Global Investment Research

     6

     November 26, 2010

     China: Healthcare

     Exhibit 5: Reasons for changes to our 12-month target prices and estimates, cont??d

     Sales est. revisions Company Shineway (2877.HK) 10E 11E 12E EPS est. revisions 10E 11E 12E Reasons for EPS and revenue changes We raise our sales estimates by 1-4% and earnings estimates by 57% in 2010E-2012E to reflect better than expected sales of TCM injection and granules due to capacity expansion. We trim our EPS estimates by 4% for 2011E-2012E while maintain revenue forecast unchanged to reflect concern over margin expansion due to less synergy upon acquisition of downstream less profitable small distributors. We raise our sales estimates by 0-5% to reflect better than expected sales of diabetic and rheumatic drugs in 2010E-2012E upon inclusion in the RDL. Our 4%-16% earnings revisions for 2010E-2012E reflects the impact of top line adjustment and margin improvement due to changes in product mix. Reasons for change in Valuation and target prices We revise Shineway's DC-based 12-month target price to HK$30.3 (from HK$25.5) to reflect changes to earnings estimates and the sector's valuation multiple. The revised target price implies 21X 2011E P/E (vs current 18X). Key risks:

    Worse-than-expected sales growth of TCM injection and further price reduction. We revise our DC-based 12-month target price to HK30 (from HK$29.8) to reflect changes in the sector's average valuation multiple. The new TP implies 35X 2010E P/E (vs current 34X). Key risks: Slower-than or better-than-expected margin expansion is a major risk to both sides. We revise GZ's DC-based 12-month target price to HK$8.7 (from HK$6.3) to reflect changes in estimates and the sector's average valuation multiple. The revised target price implies 16X 2011E P/E (vs current 18X). Key risks: Price competition is major downside risk, while better-than-expected rabies vaccine sales is our upside risk. We revise our DC-based 12-month target price to HK$3.7 (from HK$3.3) to reflect changes in earnings estimates and the sector's average valuation multiple. The revised target price implies 13X 2011E P/E (vs current 15X). Key risks: Sharp price recovery for Vitamin C and penicillin prices is our major upside risk. We revise our DC-based 12-month target price to HK$15.6 (from HK$14.15) to reflect changes in earnings estimates and the sector average valuation multiple by rolling over to 2011. The revised target price implies 28X 2011E P/E (vs current 33X). Key risks: Betterthan-expected sales of orthopedic products and cost controls are upside risks. We revise our DC-based 12-month target price to HK$30 (from US$27.3) to reflect changes in the sector's average valuation multiple by include MR to our off-shore listed coverage universe. The new TP implies 18X 2011E P/E (vs current 17X). Key risks: Slowdown in international demand and strong domestic competition are our major downside risk, while tender recovery and potential M&A are major upside risks. We revise Simcere's DC-based 12-month target price to US$11.3 (from US$8.5) to reflect changes in earnings forecasts and the sector's average valuation multiple. Our revised target price implies 21X 2011E P/E (vs current 19X). Key risks: Upside: Better-thanexpected sales of new products; Downside: drug price erosion.

     1%

     2%

     4%

     5%

     6%

     7%

     Sinopharm (1099.HK)

     0%

     0%

     0%

     0%

     -4%

     -4%

     GZ Pharma (0874.HK)

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