Investment Summary

Yunnan Baiyao is a pharmaceutical firm engaged in R&D, producing and distribution. Baiyao, developed in 1902, is a famous anti-infective and hematostatic traditional Chinese medicine (TCM). The Baiyao formula is a state-level secret with a strong customer base and high brand awareness. Recent years, the company based on Baiyao series develops other medicines, cosmetic products and nourishing healthcare products, as well as exploits distribution business. The company recorded FY07-16 revenue/net profit CAGR of 20%/27%, and we expect it to maintain relatively high growth with EPS RMB3.13/3.55 in 17E/18E. Assuming PE 33x (roughly par to 2y historical average plus 1.5x standard deviation), we initiate TP of RMB117.7 with 18.5% upside, `Accumulate` recommendation. (Closing price at 14 Dec 2017)

Business Overview

Bright Outlook of Manufacturing Sector With Baiyao series as cornerstone, the company keeps exploring great healthcare industry involving Western and Chinese medicines and raw materials, personal healthcare products, TCM, etc. The company now owns 40 production lines producing over 19 formulas and 390 products. The manufacturing sector delivered FY11-16 revenue CAGR of 15.68% with 61.8% average gross profit margin (GPM). In 1H17, manufacturing sector recorded sales RMB4.97bn (42% of topline) with 9.5% YoY growth and 66% GPM (+4.79ppts, 1H16: 61.23%).