Tonghua Dongbao:Growth acceleration due to inventory build-up
Solid growth from insulin franchise; reiterate Buy
Tonghua Dongbao (THDB) reported sales/core profit of RMB616m/199m in 2Q17,representing YoY growth of 40%/31% respectively. We highlight the revenuegrowth acceleration in 2Q17, compared with 25%/34% YoY growth in 1Q17. Thegrowth acceleration was primarily due to inventory build-up from newly-signeddistributors. As for insulin glargine, THDB is in the final stage of data collection,with production filing expected in August according to management. We expectthe volume boost from NRDL inclusion to start in 4Q17. Reiterate Buy on highearnings visibility/ sustainability, and near-term catalysts.
Solid ramp-up of 40R sales, while 50R lagged
We estimate that insulin products achieved sales of RMB470mn in 2Q17 vs.
RMB359mn in 2Q16, representing 31% YoY growth. Insulin needles and teststrips delivered over 30%/ 20% growth respectively, in 2Q17, suggesting growthmoderation vs. 38%/ 56% achieved in 1Q17. The slowdown in test strips wasdue to device compatibility and configuration issues of Bionime blood glucosemonitors. THDB's dual-product strategy started to bear fruit for Gansulin 40R, butyielded little results for 50R this quarter. As for flagship 30R, 20% growth couldbe maintained. Management estimated total sales of 40R to surpass RMB100mnin 2017.
Expecting stable margins ahead, operating efficiency improved
GM/OPM contracted to 74.5%/39.8% in 2Q17 compared with 76.4%/44.2% in2Q16. Management attributed the margin decline to low margins from real estateinvestment disposal. THDB guided stable margins going forward, with limitedASP erosion expected from provincial tenders. CCC days returned to 650 daysin 1H17, down from 897 days in 1H16, suggesting the conclusion of inventorydestocking issue.
Lowering PT to RMB23.7 from RMB25.8; risks
Our target price is based on 42x 2018E EPS. We believe the multiple is justifiedas its A-share peers are trading at 28x with 18% growth in 2018 (vs. the 21% wemodel for THDB). In our view, the premium is justified by its growth sustainabilityof the insulin franchise, ramp-up of CDMP and a compelling risk profile. Key risks:larger-than-expected ASP erosion, growth slowdown and product launch delays.