Jointown Pharmaceutical Group:Earnings in line,two-invoice system likely to boost direct hospital sales

Earnings in line

    9M16 revenue was Rmb45.2bn, up 24.08% YoY, with net profit attributable to theparent of Rmb460m, up 21.86% YoY. This included Q3 revenue of Rmb15.4bn andnet profit of Rmb150m, in line with our expectation. Net operating cash flow jumped40% YoY in 9M16, mainly due to: 1) an increase in cash collected on sales; and2) issuance of bills and securities backed by the company's accounts receivable assets.

    Steady growth in core segments

    Proprietary Chinese medicines (PCM) and Western drugs posted revenue of Rmb38bnin 9M16, up 20.4% YoY. Traditional Chinese crude drugs and prepared drug slicesbrought in revenue of Rmb1.5bn, up 10% YoY, and medical devices and birth controlproducts recorded revenue of Rmb3.3bn, up 47.3% YoY, with both segmentsmaintaining robust growth. Food, health products and cosmetics grew 93% comparedto 9M15.

    Two-invoice system to boost Jointown's proportion of direct hospital sales

    Policies such as the two-invoice system and the business tax-for-VAT switchover areeroding the competitiveness of smaller companies and accelerating development oflarger players such as Jointown. The company has advantages in terms of logistics andwarehousing, and if the two-invoice system is rolled out on a large scale, the companywould likely consolidate downstream delivery firms to raise coverage of hospitals,resulting in direct hospital sales accounting for a higher share of total sales. We forecastJointown's delivery business to have a 20% revenue CAGR and a 24% gross profitCAGR in 2016-18.

    Valuation: Rmb25.20 price target implies 39x 2017E PE

    Our Rmb25.20 price target is based on DCF (WACC 6.7%) and implies 39x 2017E PE.We maintain our Buy rating.