China National Accord Medicines:Results largely in line with expectations;performance of Guoda Drugstore bears watching

Results largely in line with expectations

    9M16 revenue was Rmb21.42bn (+8.85% YoY) and net profit attributable to theparent was Rmb720m (+25.91% YoY), or Rmb580m (+3.94% YoY) excluding oneoffs.9M16 net profit equalled 78% of our full-year net profit forecast, largely in linewith our expectations.

    Waiting for completion of stake transfer after getting administrative approval

    Shanghai Shyndec Pharmaceutical, the counterpart of the company's assetrestructuring deal, has obtained approval from the Ministry of Commerce, marking thecompletion of the administrative approval process, which is a prerequisite for majorasset restructuring. We estimate the subsequent stake transfer and change in companyregistration will take more than a month. At that point, Guoda Drugstore, the largestretail pharmacy chain in China, will be officially consolidated.

    Performance of Guoda Drugstore after restructuring bears watching

    As a leading pharmaceutical distributor in Guangdong and Guangxi, we believe aclearer business structure after the transfer of the controlling stake in thepharmaceutical manufacturing segment and the inclusion of the Guoda Drugstore retailbusiness will help improve the company's operating efficiency, create economies ofscale and boost its gross margin, likely resulting in faster pharmaceutical distributionrevenue growth. In addition, we believe Guoda would benefit from the separation ofthe clinic from the pharmacy and higher industry concentration, and we expectprofitability to improve.

    Valuation: Maintain price target of Rmb82.38, Buy rating

    We maintain our DCF-based price target of Rmb82.38 (WACC 7.1%) and Buy rating.