Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

Regional Small/Mid Cap Strategy Q2 2008
Sino Biopharmaceutical
Bloomberg: 1177 HK | Reuters: 1177.HK
BUY HK$1.47 HSI : 22,465
Price Target : 12 month: HK$2.73
Potential Catalyst: Strong earnings growth prospect, M&A, attractive
valuation
Analyst
Gideon Lo CFA +852 2863 8880
gideon_lo@hk.dbsvickers.com
Price Relative
2.30
2.10
1.90
1.70
1.50
1.30
1.10
0.90
0.70
HK$
0.50
90
2004 2005 2006 2007 2008
Sino Biopharm aceutical (LHS) R e la tiv e H SI IN D E X (R H S)
Forecasts and Valuation
Relative
Index
FY Dec (HK$m) 2006A 2007A 2008F 2009F
Turnover 735 1,164 1,579 2,088
EBITDA 148 292 410 577
Pretax Profit 205 342 450 604
Net Profit 141 224 294 377
EPS (HK$) 0.06 0.10 0.13 0.17
EPS Gth (%) (91.0) 58.9 31.0 28.4
PE (x) 23.6 14.8 11.3 8.8
P/Cash Flow (x) 25.6 5.7 4.2 2.9
EV/EBITDA (x) 11.9 6.2 5.0 4.0
DPS (HK$) 0.05 0.06 0.08 0.10
Div Yield (%) 3.4 4.1 5.3 6.8
Net Gearing (%) cash cash cash cash
ROE (%) 7.0 10.6 12.6 14.5
Book Value (HK$) 0.8 0.9 0.9 1.0
P/Book Value (x) 1.7 1.6 1.6 1.5
Earnings Rev (%) - -
Consensus EPS (HK$) 0.12 0.13
Sector : Health Care
Principal Business: Leading pharmaceutical company for hepatitis
and cardio cerebral medicines in PRC. It is also engaged in the coal
to chemical project in
390
340
290
240
190
140
Hybrid of high growth and
defensiveness
Story: Sino Biopharmaceutical (SBP) is our top pick in the
pharmaceutical sector. With solid track record, strong
financial position and R&D competence, SBP has all the
necessary features to be the long-term winner in the fast
growing, but consolidating pharmaceutical market in
China.
Riding on its leading position in China’s hepatitis and
cardiovascular drug markets as well as its strong new
drug pipeline, we expect the company to sustain 20-
30% annual organic earnings growth. More upside
potential will come from its M&A initiatives.
Point: Not only is its attractiveness coming from its high
growth potential, we believe SBP is a good defensive play
amid the recent global financial market turmoil,
stemming from earnings resilience of the industry and its
strong financial position.
With over HK$1.7bn net cash on hand, we believe the
tightening monetary policy in China will facilitate the
company’s M&A plan this year, as many smaller players
will be forced out of the market by stringent regulation.
Relevance: We maintain our BUY rating for SBP, despite
its relatively lack of trading liquidity. Trading at 11.3x
2008 PE with over 5% dividend yield, we believe it is
attractive for long-term investors.
With ex-cash PE of only 7-8x, it is hard to see any further
downside from the current level. The broad market
correction should provide an attractive opportunity to
accumulate this illiquid trading stock at undemanding
valuation.
At A Glance
Issued Capital (m shrs) 2,264
Mkt. Cap (HK$m/US$m) 3,328 / 428
Major Shareholders
Chairman Tse Ping (%) 47.7
The Goldman Sachs Group (%) 9.0
Chearavanont Dhanin (%) 6.3
Free Float (%) 37.0
Avg. Daily Vol.(‘000) 425
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Refer to important disclosures at the end of this report