Hualan Biological:Continue to expect growth acceleration likely in 2017

A solid quarter in 1Q; growth outlook remains strong

    Sales growth of human albumin accelerated in 1Q Hualan reported revenue/core profit of RMB538m/230m in 1Q17, representing YoY growth of 31%/35%, respectively, vs. 31% and 34% for 2016. Management indicated that human albumin was the key growth driver, with 54% growth in 1Q17 vs. 7% in 2016. The robust growth was mainly due to the 40% growth in plasma collection volume in 2016. The company targets 1,250 tons of plasma collection in 2017, suggesting 25% growth. We expect strong earnings growth to continue; however, we highlight the company recorded operating cash outflow of RMB90m, the first time since 2Q12.

    Sales growth of human albumin accelerated in 1Q

    According to the company, revenue growth for PDTs was 28% in 1Q17 vs. 34% in 2016. On flagship products, sales growth for human albumin/IVIG/factor VIII was 54%/10%/24% in 1Q17, compared with 7%/73%/46% in 2016. Management indicated that growth for human albumin was driven by volume, while ASP remained stable. For the vaccine business, the company indicated that revenue was largely flat in 1Q17. Management expects approximately RMB30m loss for the vaccine business in 2017 and breakeven in 2018, compared with RMB45m loss in 2016.

    OPM declined mainly due to vaccine business

    GM and OPM stood at 65.6% and 45.3%, respectively, in 1Q17 vs. 64.3% and 48.6% in 1Q16. Management indicated that the change in margins was driven mainly by the vaccine business, while the margins for PDTs remained stable. We highlight that selling expenses increased to RMB33m in 1Q17 from RMB4m in 1Q16 due to high invoicing for the vaccine business. Additionally, the company recorded operating cash outflow of RMB90m as AR days increased to 75 days in 1Q17 vs. 48 days in 2016. Management attributed this to prolonged credit terms granted to hospitals and distributors.

    Maintain target price at RMB43.5;risks

    We used a PE-multiple based approach for valuation, in line with other companies in our coverage universe. Our target price is based on 35x 2018 EPS. We believe that 35x is justified, as its A-share peers are trading at 32x with 20% growth in 2018 (vs. the 28% we model for Hualan). Risks include lower-than-expected plasma collection volume, greater-than-expected cost inflation, and a smaller-than-expected ASP increase.