China Healthcare:Future stays good
On 15 Feb 2017, we hosted a non-deal NDR with Jacobson Pharm (JP) (2633.HK, NR) with its management at our HK office. Our investor’s questions focus on: (1) Po Chai Pills’ (PCP) (保济丸) sales and formulation in China and Hong Kong; (2) newly acquired Ho Chai Kung’s (HCK) (何济公) wider net margin; and (3) western generic drug sales and pipeline. The counter currently trades at 18.0x trailing P/E (12.2x EV/EBITDA), versus global and HK sector median at 24.2x (17.0x EV/EBITDA) and 18.0x (12.2x EV/EBITDA) respectively.
Top generic drug supplier to HK hospitals and local doctors
In 2015, JP’s market shares within HK Hospital Authority in cardiovascular, oral anti-diabetics, digestive system, central nervous system, and respiratory system areas were 68.8%, 65.0%, 52.1%, 50.1%, and 29.9% respectively. Whereby its generic drugs made by its subsidiaries such as Europharm (欧化药业) and Jean Marie (香港正美药品) have been well recognized and prescribed by local HK doctors for decades. Amongst the top five drug-makers in HK generic (western) drug market, JP was ranked #1 with 32.7% market shares by revenue in 2015.
Renowned OTC - Po Chai Pills outlook keeps solid
JP also sells proprietary OTC Chinese medicines, reaching as much as HKD139m in 3/FY16 (+28% y-o-y), making up 12.8% of 3/FY16 total revenue (3/FY15: 11.5%). However, in 1H17, Chinese medicine sales fell 7% y-o-y, on the absence of PCP’s China sales for several months, from the change of PCP’s China distributorship. Further, management clarified to our investors that the PCP’s formula for sales in HK and China, which are under different name as Po Chai Pills (保济丸) in HK/ overseas and Puji Pills (普济丸) in China, are largely the same. However, as some local firms in China have already made PCP years ago in altered formulae using the same trade name Po Chai Pills (保济丸) in China, JP would have to coin their PCP at another similar name for China sales. Note that, in May 2016, the CFDA reclassified PCP as an OTC drug in China instead of being a prescription drug sales in the past. We see PCP will have broader usage in China, should JP intensify its advertisements over China’s media.
Stock catalyst stays at newly acquired Ho Chai Kung
On 12 Dec, JP announced it to acquire another OTC Chinese medicine brand, Ho Chai Kung (HCK), a well-known analgesics (pain-killer) medicine. The cash consideration is HKD568m, implying a 14.7x 3/FY16 P/E versus JP’s over 20.0x. The deal was funded by IPO proceeds and bank loans, expecting it at a net gearing position of over 15% at end-Mar 2017 (end-Sept 17: net cash at HKD55m). HCK had a reported net profit at HKD39m (+7.8% y-o-y) in 3/FY16F, with a wider net margin at 45.4% versus its PCP at 20%-30%. We reckon this was due to HCK’s (1) sales all based in HK with less marketing cost required compared to PCP did; and (2) upsurge in selling price in HK. After JP’s management update, we expect HCK’s (1) revenue to stay at 10% y-o-y growth, similar to 3/FY16 at 11% y-o-y; and (2) volume growth to be improved post integration with JP. As we flagged in our 10 Jan 2017 report, we calculate that JP will have an additional 2%/ 19% net profit from HCK in 3/FY17 and 3/FY18 respectively, even if we assume a flat growth for both JP and HCK in these two years.