Event: Following are point of views we drawn from recent research on Renhe Pharmacy.
Our analysis and estimation: Renhe Pharmacy is a superexcellent OTC corporation. As shown in interim report, the company achieved good performance in 1H2008 and posted sales revenue of Rmb361mn (+7.68% yoy), total profit of Rmb3.26721mn (+19.5% yoy) and EPS of Rmb0.11. Besides, net profit attributable to parent totaled Rmb2.38247mn (+4.02% yoy) or Rmb2.39214mn (+45.80% yoy) deducting non-recurring profit and loss.
Future growth driving forces rest with two aspects: 1) Good marketing enhanced sustainable growth of anti-cold medicine. The company’s core businesses, drugs and healthcare products gained revenue of Rmb398mn and Rmb380mn respectively, of which, Kelike and Youkadan made up ~75% and increased 12% and 30%, being the main driving force of performance growth. Meantime, we should notice the fierce competition in anti-cold medicine market and remarkable background of its foreign peers; great challenges existed for future growth.
2) Asset injection brought growth. Renhe Pharmacy has announced its promise on Nov 11 2006 to inject asset to Jiangxi Kangmei Healthcare, Jiangxi Yaodu Renhe Pharmaceutical, Jiangxi Yaodu Renhe Bio-healthcare, Jiangxi Yaodu Renhe Herbal or Jiangxi Shanliang Pharmaceutical by different conditions. We believe Jiangxi Kangmei Healthcare and Jiangxi Yaodu Renhe Pharmaceutical are the most likely to receive injection with their main products Fuyanjie and Wuji Baifengwan; however, increasing revenue will probably bring negative influence for limited space for development.
Additionally, earnings transparency will be affected for large sum of correlated transactions. We believe the issue will be solved after asset injection.
Earnings forecast and rating: Without consideration of asset injection, we forecast 2008-2009E turnover and EPS to be Rmb857mn, Rmb0.25 and Rmb950mn, Rmb0.28 respectively with PE of 29.24x and 26.11x based on closing price of Rmb7.31 on Sep 4 2008, and estimation is well-positioned referring to industrial level. But due to undecided injected project, detailed approach and schedule, we suspend the estimation rating and keep close attention to the company.