Jiangsu Nhwa Pharmaceutical:Stable top-line growth;gross margin rose

Stable top-line growth

    9M16 sales were Rmb2.26bn, up 11.72% YoY, decelerating 1ppt from H1. Thisincluded sales of Rmb750m in Q3, up 9.84% YoY. Net profit grew 17.8% YoY in9M16. The company's core business is posting steady revenue growth, with newproducts likely to be the key driver in future. Of the company's new products launchedin the last several years, we think the following have high growth potential: duloxetineand aripiprazole tablets (psychotropic drugs) and propofol/remifentanil anddexmedetomidine (anaesthetics). Duloxetine is currently performing well in tenders;global sales of this product could peak at US$4bn, and it faces a benign competitivelandscape in China, with just three manufacturers (Lilly, Zhongxi and Nhwa). Globalsales of aripiprazole tablets could peak at US$7bn, and this product is currently sold byfour companies in China (Otsuka, Kanghong, Zhongxi and Nhwa).

    GPM improved on higher weighting of drug manufacturing in total revenue

    Gross profit margin (GPM) increased to 45.01% in 9M16, up nearly 4ppt from thesame time last year. The increase in GPM was mainly due to revenue mix changes, withthe higher-margin drug manufacturing business accounting for a bigger share of totalrevenue, and brisk growth in preparations.

    Overall expense ratio rose markedly

    The overall expense ratio reached 30.23% in 9M16, up nearly 3ppt from the same timelast year. This was chiefly driven by a higher selling expense ratio (+3.9ppt YoY). Theadministrative expense ratio stayed broadly flat, while the financial expense ratiodeclined nearly 0.6ppt YoY due to a big dip in financial expenses resulting from theparent company's bank loan repayments and wealth-management product income.

    Valuation: Maintain Rmb28.67 price target, Buy rating

    9M16 net profit was Rmb254m, up 17.8% YoY, with net profit growth outpacingrevenue. We expect net profit to grow 15-30% YoY in full-year 2016. Our DCF-basedprice target is Rmb28.67. We believe the company's business mix is continuing toimprove, and although its major products are negatively affected by tender price cuts,the impact appears to be limited. Furthermore, we see high growth potential for certainpsychotropic and anaesthetic products launched in the past several years. We maintainour Buy rating.