Brokers' Take Asiapharm Group, Aug 17 close: 63.5 cents August 18, 2006
The Business Times PHILLIP SECURITIES RESEARCH, Aug 15 IN 1H06, AsiaPharm's net profit grew by 2.2 per cent year-on-year to 40.94 million yuan ($8.07 million), although revenue slid slightly by 6.6 per cent to 153.1 million yuan. Sales in 2Q06 decreased by 16.9 per cent quarter-on-quarter to 76.5 million yuan, and net profit decreased by 17.4 per cent to 20.2 million yuan.
This decline was primarily the result of new government regulations affecting AsiaPharm's best-selling product Maitongna. The sales of Maitongna dropped 15 per cent half-on-half to 57.1 million. The increase in sales of Lutingnuo and Nuosen became softer, at 14 and 35.3 per cent respectively. This softening was due to ongoing healthcare restructuring and China's current pharmaceutical industry environment.
Sidinuo is showing market potential by 76 per cent increase in sales. Revenue drop in pharmaceutical drugs distribution, active pharmaceutical ingredients (API), and R&D is in line with the group's strategy to keep shifting from low-margin distribution business and API sales to high-margin sales of pharmaceutical drugs.
R&D output will likely sustain the group's future product pipeline. Due to AsiaPharm's current strategies, it has been able to keep its gross profit margin increases to 79.9 per cent and net profit margin increases to 26.9 per cent. Sales of pharmaceutical drugs contribute 88 per cent of the revenue.
Chinese healthcare system restructuring: China's healthcare system is undergoing quality changes and this could continue for the next few quarters. The newly released regulations try to keep healthcare affordable to the general population. The approval of new drugs will be stricter and is likely to take a longer time. The new government policies encourage new products and provide better intellectual property protection. At the same time, the government is likely to continue controlling the prices of commonly prescribed drugs. These changes could result in the profit generated in the industry chain being reallocated.
The new government regulations could cause the pharmaceutical industry to grow slower in the next several quarters. The new regulations could also increase the speed at which small and low quality factories become obsolete, and lead to more mergers and acquisitions. In the long run, the market would be favourable to those companies, which have strong R&D, distribution networks, management team and strict GMP system. In the short term, AsiaPharm is likely to face increased competition, but in the long run, the outlook is positive.
Maintain 'hold': We adjust down our revenue forecast for FY06 and FY07 to account for the lower than expected sales due to China's healthcare restructuring and the shift to higher margin drug sales. Meanwhile, we slightly lower the distribution cost assumptions to reflect AsiaPharm's cost control efforts.
We revise down the fair value for AsiaPharm to $0.64, based on 15 times PE, and FY06 and FY07 blended EPS. AsiaPharm's share price has been quite volatile since the beginning of 2006, and is currently trading at 2.24 times FY06 P/NTA, 15 times FY06 PE and 18.3 times FY07 PE. Investors should not overlook the fact that over 80 per cent of AsiaPharm's sales are reliant on only three key drugs currently, which may increase the product concentration risk especially during the system restructuring period.
HOLD Compiled by Matthew Phan | 
