Shanghai Tofflon Science and Technology:Enriching product portfolio to offset industry's capacity adjustments

H116 revenue/net profit fell on lower demand

    Tofflon reported H116 revenue/net profit of Rmb726/143m, down 8.13%/28.25%YoY. Meanwhile, EPS was Rmb0.23. Revenue and net profit fell mainly because thedrug manufacturing equipment sector entered a period of capacity adjustments ondecreased demand and saw growth decline, as new GMP certification ended and drugmanufacturers' GMP-related plant upgrades peaked.

    Gross margin contraction amid intense competition

    With overall freeze-dryer prices lower amid competition, Tofflon's gross margin fell to43.34% in H116 from 47.18%. Freeze-dryers saw revenue rise 32.25% YoY and grossmargin fall 5.97ppts. Freeze-dry systems posted a 23.49% drop in revenue and a3.06ppt decline in gross margin. Other drug manufacturing equipment had revenuegrowth of 19.77% YoY, with a 3.09ppt drop in gross margin. Tofflon continued tostep up new product development and sales and promotion of system integrationprojects, enabling it to maintain rapid growth in freeze-dryers and other drugmanufacturing equipment.

    Enriched product portfolio thanks to acquisition

    Apart from the traditional drug manufacturing equipment area, Tofflon has activelyinvested in areas such as medical equipment and precision medicine. In 2015, Tofflonacquired Genuine Technology to tap into IT-enabled drug manufacturing and usheredin a manufacturing industry 4.0 era with turnkey contracting. In our view, although thecompany will likely see revenue/profit growth fall in the short term under the overallpressure on the industry, the development of the industry 4.0 business could greatlyoffset the risk of declining growth in freeze-dry system revenue in the long run.

    Valuation: PT of 24.99; maintain Buy rating

    Our DCF-based price target of Rmb24.99 uses a WACC of 8.5%. We maintain our Buyrating.