Performance May Keep Rebounding after Hitting Bottom
Yibai Pharmaceutical bore great pressure in 2015 when its net profit kept diving from the second quarter through the fourth quarter compared with a year before, which was mainly attributable to a Y-o-Y decrease of 11% in the sales of Aidi Injection, a major product, as well as the slow sales growth of Considi. What's more, the company adjusted its sales strategy and proactively developed the market of second-tier products. The total expenses to development and promotion increased by RMB620 million, leading to a Y-o-Y increase of 6.6 percentage points in sales expense ratio and 2.2 percentage points in administrative expense ratio. Consequently, its net profit recorded a Y-o-Y decrease of 60.4% to RMB189 million, representing a decrease of 9.4 percentage points in net profit margin.
However, the company's performance improved significantly in 1Q16. The revenue yielded a Y-o-Y increase of 9.1% to RMB740 million while the net profit soared by 41.4% to RMB82.44 million. This was mainly attributable to the gross profit margin of a Y-o-Y increase of 1.4 percentage points to 80.8% as well as the elimination of short-term increase in expense. Expenses ratio of the first quarter fell back to 66.2%. We hold that the launch of second-tier products and normalizing expenses ratio will fuel the company's ongoing growth.
Proactive Transformation to Medical Service Business
In June 2015, the company put forward the strategy of transforming to medical service, a double-track model in which pharmacy serves as the root and tumor medical ecosystem as priority. In the same year, the company successively established an industry M&A fund, a tumor medical investment management company and a tumor easy-medical-revisit big data company. Since 2016, apart from the building of Jinshazhou Tumor Center, the company has been pushing forward the development of other tumor medical centers. In April, its subordinate Anhui Oncologist Group was founded. The company has acquired one Grade-3 Level-B hospital and contracted with 11 tumor medical centers without equity ties and another 8 with equity ties. In addition, expansion in Heilongjiang Province and Sichuan Province is in progress. As it is planned, the company will establish 20 to 25 medical groups at the provincial level, invest in 300 tumor medical centers as well as develop and manage 1,200 tumor medical centers.
As it is expected, we are likely to develop China's biggest tumor medical platform. By virtue of abundant cash reserves (with approximately RMB800 million monetary resources in 1Q16) and well-performing cash flow of the pharmacy business, the company is expected to keep promoting multi-model acquisition and expansion of medical services, develop a tumor treatment system that integrates surgery, radiotherapy, chemotherapy, imaging, diagnosis, rehabilitation and precision medicine, and build a close-loop ecosystem of the tumor industry featuring "medicine + hospital + doctor". The model of medical group involves doctors in management and investment. It is also expected to address the issues of private capitals investing in hospitals. We believe the model embraces promising prospects.
Valuation
The company's performance for 2016 will rebound after it hits bottom. Its deep-seated product line and powerful sales capacity will contribute to a steady growth in pharmacy. In the meanwhile, a medical platform with tumor hospitals at the core and ongoing launch of newly-acquired hospitals are expected to bring rapid growth in medical revenue. In other words, the revenue from medical service business may achieve double growth in 2016 and will enjoy an equal share with its original primary business in long and middle term. We give the company 35X EPS in 2016, and the target price is RMB20.3, with the "Accumulate" rating. (Closing price as at 15 July 2016)
Risks
Progress of transformation falling short of expectation;
Risk of price drop in drugs.
Financials
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