Shanghai Jahwa:Trading suspension related to potential acquisition;better visibility of Herborist

Event – Shanghai Jahwa suspended trading from 21Sept on potentialAcquisition。

    Shanghai Jahwa announced on 21Sept. 2017to suspend trading for no morethan five working days from the announced date. The company received anotice from its parent company, Shanghai Jahwa Group, that it was preparinga significant asset restructuring, which might involve Jahwa’s related asset orequity acquisition. According to Jahwa, it will decide whether the related eventcan be defined as a significant asset restructuring and will announce the progresswithin five working days.。

    Deutsche Bank view。

    Trading in the shares of Jahwa remains suspended. Based on our understanding,there is no potential asset at the parent company level that can be injectedinto the listco. We believe the market might relate its announcement with PingAn’s recent acquisition of Tsumura, which has a similar product positioning asJahwa’s Herborist.。

    For reference, ChinaPing An (2318.HK, Buy), the controlling shareholderof Jahwa, announced on 22Sept. 2017that it had reached a strategicagreement with Tsumura & Co. (4540.TT), the largest producer of Kampo extractintermediates and granular Kampo formulations in Japan. Tsumura issued 7.7mshares to Ping An at a consideration of RMB1.6bn. Once the acquisition iscompleted, Ping An will own 10% of the total shares and will become the largestshareholder of Tsumura. Ping An will set up a JV to further develop the Kampoextract and formulations business globally.。

    Below is our 2H17operation update. While we believe Jahwa's outlook isimproving with sales growth resuming for most core brands, its selling expenseratio is likely to remain high at 37% in 2H17E (1H – 49%). Thus, we believe it isfairly valued at 41x 2018E PE and 32x 2019E PE.。