Event: Sanjiu Medical & Pharmaceutical announced share reform adjustment released from Sep 7. Outlines of new share reform: 1) Equity division reform implemented 3 bonus shares for every 10 shares to registered shareholders; besides, the company set up superaddition arrangement, its potential holding shareholder, New Sanjiu Medical & Pharmaceutical promised that the company would propose another payout scheme if operational performance did not achieve fixed goals after reform implementation. 2) Non-tradable shares were not allowed to come into the market in 60 days from the first trading day after company requisition. 3) Equity registration date of relevant shareholder conference was Sep 18 2008; the conference would be held on Sep 26 and online voting from Sep 24 to 26.
Our analysis and estimation: 1) Payout scheme of 3 bonus shares for every 10 shares is basically in line with original anticipation and interests from different aspects. Additionally, actual bonus proportion is higher than the former scheme of 1.652 bonus shares for every 10 shares plus cash earning right taking effects two years later. We believe it has much more possibility to be approved and accomplishment of share reform is expected.
A. Difference exists in understanding share reform released on Jul 9, thus readjustment is under expectation.
B. New scheme, direct bonus payout, is superior to the former with more possibility to gain approval from shareholders.
2) Superadditional scheme is a commitment rebating risks from investors.
The company promised that Sanjiu Medical & Pharmaceutical will pay superadditioanal shares if any condition stated below was violated: A. The company realized basic EPS of less than Rmb0.50/share in 2008; B. The company realized basic EPS of less than Rmb0.65/share in 2009. Additional bonus amount totaled 7.8mn shares (translating into 3 bonus shares for every 10 shares).
We believe this indicates confidence for future and stabilizes earnings forecast as well as reduces risks to certain extent.
Earnings forecast and rating: Sanjiu Medical & Pharmaceutical is expected to become a domestic OTC bellwether and industrial benchmark. We forecast its revenue, net profit and 2008 EPS be Rmb3.981bn, Rmb499mn and Rmb0.51 while Rmb4.675bn, Rmb636mn and Rmb0.65 for 2009 respectively; besides, 2007-2009E PE be 61.55x, 34.49x and 27.06x based on closing price of Rmb17.59 on Jul 2, translating into 47.34x, 26.53x and 20.82x due to payout scheme of 3 shares for every 10 shares. As a result, the company is fairly attractive from estimation and we maintain “Cautious” rating for the counter.