Jiangsu Nhwa Pharmaceutical:Ramp-up in new product sales to fuel growth

New products likely to be main driver of revenue growthNhwa's stable overall revenue growth is mainly driven by new products, as older onesare entering a mature period with limited growth. Among Nhwa's new products, webelieve duloxetine (psychotropic), aripiprazole tablets (psychotropic), propofol(anaesthetic), remifentanil (anaesthetic) and dexmedetomidine (anaesthetic) have bettergrowth potential. Duloxetine/aripiprazole tablets have global peak sales potential ofUS$4bn/7bn, we estimate, in addition to a favourable competitive landscape in China.

    Rich R&D pipelineNhwa has more than 50 R&D projects, covering a full spectrum of central nervoussystem drugs. Also, it has a well-established R&D platform for original psychotropic andanalgesic drugs. It received regulatory approval for clinical trials on five of its productsin H116. New products in the pipeline may be able to support Nhwa's sustainabledevelopment.

    Increased spending on salesAmong Nhwa's main products, new ones are replacing older ones. A ramp-up in newproduct sales could be the key to Nhwa's growth, which requires increased spendingon sales. Nhwa's selling expense ratio rose c4ppts YoY in Q316.

    Valuation: Cutting price target to Rmb26.09; maintain BuyWe are raising our 2016-18E selling expense ratio 0.9/0.9/1.1ppts because we expectNhwa to increase spending on sales. As a result, our 2016-18E EPS fall 9%/10%/10%to Rmb0.54/0.69/0.90. Our new DCF-based price target of Rmb26.09 assumes WACCof 6.6% (down from 7.2%) and medium-term ROIC of 19% (down from 21% toreflect the tough operating environment facing drug manufacturers). We maintain ourBuy rating, as we believe Nhwa's business mix is improving and growth couldaccelerate on the ramp-up in new product sales.