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Asia Pacific Equity Research15 October 2011

China HealthcareShattered landscape; hope and opportunity Sell-off creating buying opportunities: The MSCI China healthcare index (down 13.5% in the past three months and 28% YTD) is trading at the lowest multiples since mid-2009, with many counters offering enticing valuations when set against the growth prospects, in our view. We believe the sentiment has been too negative given that the secular growth of healthcare industry looks intact and it is in the governments interest to strengthen, not weaken, the domestic players. We are confident that many healthcare companies can withstand short-term negative macro headwinds and emerge with growth outlooks intact. We believe the recent sell-off has created some attractive buying opportunities. Fundamentals for long-term growth look strong - underpinned by ageing population, rising disposable income, increasing government healthcare expenditure, and expanding insurance coverage: Annual drug sales are expected to grow nearly 20% annually for the next 5-10 years and China will become the third-largest drug market in 2011 and No.2 by 2020, according to IMS China. The use of medical devices will continue to expand given low penetration levels. Increased government spending will benefit all healthcare subsectors as we foresee total healthcare spending as a proportion of GDP rising from 5% today to about 10% by 2020, growing at a CAGR of 18%, roughly twice that of nominal GDP growth for next 10 years. We prefer devices over drugs because of price cut overhang: We see continued short-term pricing pressure on pharmaceuticals as we expect the recent Fujian type of drug-tendering to possibly be repeated in other provinces. With rising raw material costs and labor inflation, and price-cuts taking full effect in 2H11 for many drugs, consensus profit projection for many drug companies could be at risk. Hence, in the short term, we prefer medical device players to drug names for lower regulatory risks. Stock picks: Buy Sino Biopharma for 54% upside potential, Sinopharm for 46% upside, and Mindray for 29% upside. Those are leaders of their respective subsectors that possess sustainable competitive advantages to keep them strong for years to come. We recommend selling China Shineway due to its continued downside earnings risk from EDL drug cuts. We are Overweight on Weigao, Sihuan, and Concord Medical Services, and Neutral on United Labs and MicroPort.China healthcare coverage universeCompany Name CHINA SHINEWAY (UW) CONCORD MEDICAL (OW) MICROPORT (N) MINDRAY (OW) SHANDONG WEIGAO (OW) SIHUAN (OW) SINO-BIOPHARM (OW) SINOPHARM (OW) UNITED LAB (N) Code 2877 HK CCM US 853 HK MR US 1066 HK 460 HK 1177 HK 1099 HK 3933 HK Price (PT) 11.5 (12) 3.19 (4.6) 4.7 (5.5) 24.8 (32) 9.2 (11.5) 3.14 (4.9) 2.28 (3.5) 20.6 (30) 6.46 (7.5) MCAP US$m 1,223 151 868 2,857 5,311 1,847 1,444 6,362 1,078 Vol US$m 5.6 0.1 1.2 12.6 5.4 4.2 2.4 15.2 3.5 1W Chg 24.2 3.2 9.3 2.6 15.8 18.5 4.6 4.8 16.2 3M Chg (16.1) (21.3) (5.1) (7.3) (16.1) (1.9) (14.9) (11.0) (25.0) 11E P/E (x) 9.8 6.3 20.0 17.1 30.1 15.5 20.1 21.1 6.7 12E P/E (x) 9.0 4.7 15.9 14.5 22.5 12.1 17.0 14.6 4.6 11E EV/ EBITDA 5.0 2.6 11.1 10.7 23.2 9.1 7.4 10.4 5.1 11E ROE (%) 22.8 8.5 12.9 16.4 23.8 12.2 15.1 14.7 22.7 P/B (x) 3.6 0.9 3.0 2.6 7.6 2.9 3.6 4.5 3.2 11E Yld (%) 1.8 0.0 0.0 1.2 1.0 0.0 2.8 0.8 2.6 ND/E (%) (76.1) (23.8) (44.3) (47.6) (44.8) (54.0) (42.0) (22.8) 34.1

Healthcare Sean WuAC

(852) 2800-8538 sean.wu@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited

One-year China & APxJ Healthcare20% 10% 0% -10% -20% -30% -40% -50%

Nov-10 Dec-10

Feb-11 Mar-11

Aug-11

Apr-11 May-11

MSCI China H APxJ Healthcare MCSI China Healthcare

Source: Bloomberg

Three-month China & APxJ Healthcare5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% 1-Jul 1-Aug 1-Sep

MSCI China H APxJ Healthcare MSCI China Healthcare

Source: Bloomberg

Source: Bloomberg, J.P. Morgan estimates. Prices as of close 13 October 2011.

See page 144 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com

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Sean Wu (852) 2800-8538 sean.wu@jpmorgan.com

Asia Pacific Equity Research 15 October 2011

Table of ContentsInvestment summary................................................................3Poor performance creates opportunity......................................................................3 Why the underperformance .....................................................................................4 Why would the sector recover .................................................................................5 Stock investment views ...........................................................................................7 Valuation Analysis and Price Targets.....................................................................14

Healthcare a major pillar industry......................................15Fundamentals driving industry growth to remain intact ..........................................15

Chemical-Drugs/APIs .............................................................27Pharmaceutical demand by therapeutic area ...........................................................32 Selected chemical drug companies in China...........................................................33

Medical Equipment/Devices ..................................................36Key success factors in Medical Devices.................................................................37 Selected medical equipment/devices companies in China.......................................38

Traditional Chinese Medicines ..............................................40Selected Pharmaceutical and TCM companies .......................................................42

Medical Distribution/Retailing ...............................................44Selected companies with extensive drug-distribution businesses.............................48

Chinese Vaccine Market ........................................................50Selected companies in the vaccine space................................................................51

CompaniesChina Shineway Pharmaceutical Group Limited ....................................................54 Concord Medical Services Holdings Limited .........................................................63 MicroPort Scientific Corp......................................................................................74 Mindray Medical...................................................................................................85 Shandong Weigao Group Medical Polymer Co. Ltd. ..............................................93 Sihuan Pharmaceutical Holdings ......................................................................... 104 Sino Biopharmaceutical....................................................................................... 115 Sinopharm .......................................................................................................... 127 The United Laboratories...................................................................................... 136

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Sean Wu (852) 2800-8538 sean.wu@jpmorgan.com

Asia Pacific Equity Research 15 October 2011

Investment summaryPoor performance creates opportunityThere has never been a more tumultuous period for healthcare stocks than the third quarter of 2011. Clearly, the overall market has not done well, but is not the healthcare industry a defensive sector, resistant to the business cycle? We believe this might still hold true, but Chinese healthcare stocks have done badly owing to some specific issues pertinent to this industry. During 3Q11, the MSCI China healthcare index fell by 23%, while the Chinas A-share drug index and MSCI APxJ healthcare index fell by about 10% and 15%, respectively. Given the relatively better performance by the A-share drug companies, the H-share China healthcare names have apparently suffered disproportionally more. Among our coverage space, The United Labs performed the worst, with a 3-month decline of about 50%, while Mindray managed to perform relatively well but still dropped by 16%. While the current macro-environment does appear to be difficult for the healthcare industry and some level of stock pull-back is understandable and healthy in light of excessive valuation for some companies, we believe that the recent carnage suffered by healthcare stocks have nonetheless created very attractive buying opportunities for many of our companies. We believe the sentiments have been too negative. Chinas healthcare industry remains a secular growth story and, over the long term, healthcare stocks are bound to outperform the general market, in our opinion. Our top picks are Sino Biopharmaceutical, Sinopharm, and Mindray.Figure 1: Healthcare stocks took a beating in 3Q11%10.0%

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-20.0%

-30.0%

-40.0%

-50.0%

-60.0% 7/5/2011 7/12/2011 7/19/2011 7/26/2011 2877 HK 1066 HK 3933 HK

8/2/2011

8/9/2011 8/16/2011 8/23/2011 8/30/2011 853 HK 1177 HK MSCI APxJ Healthcare

9/6/2011 9/13/2011 9/20/2011 9/27/2011 MR US 1099 HK MSCI China Healthcare

CCM US 460 HK A-share Drug Index

Source: Bloomberg

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Sean Wu (852) 2800-8538 sean.wu@jpmorgan.com

Asia Pacific Equity