Tasly Pharmaceutical Group:Destocking continues,while end-market demand maintains steady growth

Q316 destocking continued while manufacturing revenue continued to decline

    Tasly's Q1-Q316 revenue was Rmb9.6bn, with pharmaceutical manufacturing revenuedown 14.46% YoY to Rmb4bn and pharmaceutical distribution revenue up 19.13%YoY to Rmb5.6bn. Net profit attributable to the parent fell 17.7% YoY to Rmb1.0bn.Q316 manufacturing revenue was Rmb1.4bn, down 13% YoY, a larger decline than inQ216. Q316 distribution revenue was Rmb1.8bn, up 17% YoY. The main reasons forthe lower-than-expected manufacturing revenue are strict control of receivables andclearing of channel inventory. The parent's receivables continued to fall, downRmb140m from end-Q216. Q1-Q316 net cash generated from operating activities roseRmb419m from the same period last year, up 138% YoY.

    Good sales growth in the end-market

    IMS sample hospital data show that the main products continued to grow in the endmarket.In January-August, Dantonic/Yangxue Qingnao grew 8.0%/8.5%, whileSalvianolate/Puyouke grew 2.9x/5.4x. In our view, with end-market demand for Tasly'smain products maintaining strong growth, the company's manufacturing revenue islikely to recover next year after the completion of destocking.

    Dantonic phase III results a milestone for Tasly and the TCM sector

    We think the results of Dantonic's phase III US clinical trial will be available soon, andwe believe the market has not fully priced in this expectation. Given the encouragingphase II data, we believe there is a high likelihood that the phase III results will bepositive, which could lead to: 1) the launch of Dantonic in the US and other developedmarkets; 2) partnerships with multinational corporations; 3) expansion of indications forDantonic; and 4) the beginning of a new era for TCM modernisation.

    Valuation: Price target of Rmb59.58, implying 34x 2017E PE

    We value Tasly's existing business at Rmb48.61 per share based on DCF (WACC 6.4%).We value the Dantonic angina indication in the overseas market at Rmb10.97 pershare. We derive our price target of Rmb59.58 using sum-of-the-parts, implying 34x2017E PE. We maintain our Buy rating.