Jointown Pharmaceuticals:Closing the gap through solid execution

Another solid quarter delivered; reiterating Buy.

    Jointown reported revenue/ core profit of RMB15bn/144m in 3Q16,representing YoY growth of 23%/43% vs. 25%/36% in 1H16. Theoutperformance is attributed to robust growth in the hospital segment, lowertax expenses, and logistic channel improvement. The company guidedRMB880m reported profit for 2016, suggesting 32% growth in 4Q16. Also,management remains confident of maintaining over 20% growth in the nextfew years. On the two-invoice system, executives revealed that there are 24ongoing M&A negotiations with distributors and 15-17 have already beensigned. However, the financial impact of these acquisitions would be limited.

    Strong growth momentum maintained.

    Chemical drugs, medical devices, nutritional supplements, and TCM deliveredYoY growth of 18%, 43%, 211%, and -5% in 3Q16, vs. 22%, 49%, 49%, and20% in 1H16 respectively. We highlight that chemical drugs, the largestrevenue driver, continued to outgrow the industry, while robust growth innutritional supplements was due to the new infant formula products fromAbbott and Wyeth. Management also highlighted that the hospital segmentdelivered over 30% growth. On the logistics network coverage, the companytargets operations in 28 provinces and 50 municipal cities by YE16, vs. 26 and45 respectively in 2015.

    Margin improvement due to improved customer mix.

    GM/OPM was 6.98%/ 2.17% in 3Q16 vs. 6.88%/ 2.10% in 3Q15, respectively.

    We attribute the margin improvement to outgrowth of the hospital segment.

    Additionally, the company recorded a positive tax impact of RMB10m due torebates and a change in the accounting policy. However, the impact is likely tobe one-off. On M&A, the company indicated that the priority is distributorswith broad a network instead of CSOs, which might be difficult to integratedue to compliance issues.

    Maintaining target price of RMB26.1, risks.

    Our target price is based on 42x 2017E EPS of RMB0.62. This represents apremium to its Chinese peers which are trading at 29x 2017E EPS with 20%growth (vs. 25% for Jointown). We believe the premium is justified by itsabove-industry growth and improving product mix. Key risks includeunfavorable policies and slow ramp-up of new businesses.