Investment Highlights

During 18H1, we see that revenue from three main segments, namely distribution, manufacturing and retail, increased by 10.2%/32.9%/16.7% yoy, respectively. We highlight that the company 1) continues to optimize the distribution network, 2) integrates R&D capabilities on generics and innovative drugs, 3) places importance on biopharmaceuticals, and 4) boosts chemical and TCM drugs through external mergers and acquisitions. Considering impacts form two-invoice system will mitigate in 18H2 and lead to better operating results, we thus raise TP to HK$15.2, implying 19x PE for FY18. (Closing price at 4 Sep 2018)

Business Overview

18H1 results. The company achieved revenue of HK$93,741mn, up by 13.3% yoy. Gross profit climbed by 34.7% to HK$16,881mn with GPM up by 2.9ppt to 18%. Operating profit increased by 22.6% to HK$6,296mn, while OPM increased by 0.5ppt. Significantly increased expenses is resulting from the implementation of two-invoice system, given selling expenses as a percentage of revenue increased from 6.7% in 17H1 to 9% in 18H1. Net profit attributable to shareholders increased by 24.3% yoy with NPM up by 0.2ppt.