Investment Summary

Jumpcan Pharma published its third quarterly results with revenue/net profit increasing by 21.75%/38% YoY. We forecast the future drivers come from: 1) core products` inclusion in more provincial drug reimbursement lists (PDRL); 2) enhanced sales network with expanding OTC market share; 3) sustainable and enriched product lines. We predict the topline growth rate in 2017 and 2018 to be 22% and 18%, and increase our target price to RMB45.7 with `Accumulate` recommendation. (Closing price as at 26 Oct 2017)

Business Overview

Solid growth in third quarter. In 3Q17, Jumpcan reported revenue/net profit of RMB1,403mn/326mn, representing YoY growth of 22%/38%. During the first half, Jumpcan achieved RMB2,810mn revenue (+19.39% YoY) and net profit attributable to shareholders of RMB581.8mn (+32% YoY). We attribute the high growth to expanding sales network and growth momentum of core products, including Pudilan Anti-inflammatory Oral Liquid and Child Chiqiao Qingre Granules, etc. Also we see that the company kept stable GPM and rising NPM, due to effective cost control measures and improving operational efficiency.

Improving penetration of core products. On 20th Oct, Pudilan Anti-inflammatory Oral Liquid was selected into Qinghai PDRL, so far it has been included in PDRL of seven PRC provinces and cities. We expect that Pudilan Anti-inflammatory Oral Liquid can boost its sales volume through entering into more PDRLs, given there are still 25 provinces that can be explored. We see that the two-child policy will benefit the company's pediatric products. The company's Child Chiqiao Qingre Granules are exclusive products and included in NDRL. According to the company, the Child Chiqiao Qingre Granules accounted for 34.78% in Chinese medicines for children's common cold sold in public hospitals, ranking at NO.1. The Iron Proteinsuccinylate Oral Solution, which is the first generic drug and used for treatment of iron deficiency anemia (IDA), has achieved high growth in IH17. As the previous ferrous iron solutions taste bad, which is especially unsuitable for children. Given the Iron Proteinsuccinylate Oral Solution features better efficacy and tastes better, it is expected to take over market share of previous ferrous iron solutions. We estimate that the Proteinsuccinylate Oral Solution will contribute more than RMB 100 million to company topline in 2017. And we believe that Jumpcan will continue to explore the market of core products and further improve the market penetration.

Progressive pipeline and sustainable products underpin development. Currently, three main medicines make up over 77% of topline, namely Pudilan Anti-inflammatory Oral Liquid, Child Chiqiao Qingre Granules and Rabeprazole Sodium Enteric Capsules. The company continues to nurture the market of potential drivers including Sanao tablets and Jianweixiaoshi Oral Liquid. Meanwhile, the company places importance on R&D. According to 2016 financial report, although the company's R&D to revenue ratio (3.11%) is lower than industry average (4.19%), it reported R&D expense of RMB145.3mn representing notably 30.4% YoY growth. As up to June 2017, the company has submitted 9 applications for clinical trial and 15 products are pending for production approval. The strong pipeline helps to prepare the company to achieve better performance in future.

Powerful sales team and expanding network. Currently the company has a sales team of over 2,000 staff and mainly focuses on academic promotion, covering 30 provinces and cities in PRC. And the main products Pudilan and Child Chiqiao maintained 30% and 40% YoY growth in past five years. At the same time, the company shows strong control in accounts receivables and kept the ratio of accounts receivables to revenue around 30% since 2013. The company continues to consolidate its existing market position and proactively explore OTC market through building a more efficient and professional OCT sales team. Its OTC market strategy still focus on the promoting core products, including Pudilan anti-inflammatory oral liquid, Child chiqiao qingre granules and Rabeprazole sodium enteric capsules. We expect the company to cover more hospitals and pharm chains with expanding network and excellent sales team.

Investment Thesis, Valuation & Risk

We increase our target price to RMB45.7, given its high growth in past three quarters and potential sales hike due to core products and new drivers. We expect the topline growth rate to be 22%/18% in 17E/18E, and estimate the net profit to be RMB1,114.5mn/1,296.8mn in 17E/18E. With 12% upside room, we give `Accumulate` recommendation.

Financials

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