Tonghua Dongbao:Delivering another healthy quarter

Solid growth driven by insulin franchise; reiterating Buy.

    Tonghua Dongbao (THDB) reported sales/core profit of RMB565m/214m in1Q17, representing YoY growth of 25%/34%. Steady performance in 1Q17 wasdriven by sustainable growth from the insulin arm, smooth ramp-up ofCDMP/mobile App and minimal ASP erosion from drug tenders. The companyis in the final stage of data collection, with filing for insulin glargine expectedby 17 May. Management expects the commercial launch of insulin glargine in1H18, while progress on insulin aspart could be delayed. We reiterate Buy onhigh earnings visibility and sustainability of the insulin franchise.

    Smooth ramp-up of insulin-related products.

    We estimate that insulin products achieved sales of RMB440m in 1Q17 vs.

    RMB370m in 1Q16, representing 19.3% YoY growth. Insulin needles and teststrips delivered over 38% and 56% growth, respectively, in 1Q17. Additionally,THDB will continue its product substitution strategy with Gansulin 40R/50R inprovinces where Gansulin 30R did not enter. As a reminder, ASP of Gansulin40R/50R is 10-12% higher than that of Gansulin 30R. For third-generationinsulin; production approval for insulin glargine will be filed in 17 May, and thecommercial launch is expected in 1H18. Management suggested furtherdelays in insulin aspart based on internal assessment of competitive landscapeand resource allocation.

    Expecting stable margins ahead.

    GM/OPM stood at 75.8%/44.1% in 1Q17 vs. 78.0%/44.0% in 1Q16. GM erosionwas caused by an approximately RMB30m one-off selling expense of a realestate project. Excluding that effect, management indicated that GM waslargely stable at 78-79% during 1Q17. OP margin remained flat YoY, despitethe GM decline, which is contributed by a 220bps improvement in sellingexpenses. Management guided for stable margins in 2017, with less than 2%ASP cuts from provincial tenders.

    Adjusting target price to RMB25.8 from RMB26.0; risks.

    Our target price is based on 42x 2018E EPS. We believe the multiple is justifiedas its A-share peers are trading at 27x with 18% growth in 2018 (vs. the 25%we model for THDB). In our view, the premium is justified by its growthsustainability of the insulin franchise, ramp-up of CDMP and a compelling riskprofile. Key risks: larger-than-expected ASP erosion, growth slowdown andproduct launch delays.