Investment Summary

CMS reported strong 2017 results with decreasing expense ratios. Going forward, we highlight that current core products will grow stably in addition that expected progresses in pipeline may become possible explosive catalyst for stock price. We fine turn financial data to derive 18E/19E EPS of RMB0.77/0.86, and with target PE 23.45x (par to 2-year historical average plus 1x SD) we increase TP to HKD21.97, BUY recommendation. (Closing price as at 4 Apr 2018)

Robust 2017 Results

The company reported revenue of RMB5348.8mn (+9.1% YoY), mainly attributable to sales hike in 2017 (excluding Two-invoice System effect, topline RMB5578.6mn, +21.2% YoY). GPM rose from 59.4% to 65%, however, excluding TIS effect there is 1% decrease in GPM, given ASP down by 1.9pp. We see efficient cost control measures, given EBITDA margin increased by 0.7pp, with the percentage of selling/administrative expenses in revenue dropping by 0.8pp, as well as stable NPM. We see climbing inventory days and A/R days, mainly due to TIS effect (lower COGS) according to the management, which drew down turnover and added turnover days. Meanwhile, ROE rose by 0.9pp to 24.6% with stable payout ratio 40%.