Investor Notes - Phillip Securities (HK) Ltd
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31 Oct, 2019 (Thursday)

FSE Services Group (331) has maintained its position as one of the leading E&M engineering companies in Hong Kong. The Group is primarily engaged in the provision of E&M engineering, environmental management services, management of cleaning and waste disposal services, recycling and environmental disposal services and provision of laundry services. The Group recently announced the proposed acquisition of a Target Group (including the Urban Group and the Kiu Lok Group) that is principally engaged in the provision of property management services. The acquisition is expected to help expand its business scale and reduce cyclical risks with diversification of revenue stream and client bases. The Proposed Acquisition could enable the Group to further diversify its revenue stream and mitigate cyclical risks typically associated with the E&M engineering segment. Additionally, there will be more cross-selling synergies and complement some of the Group`s existing business such as E&M engineering business and environmental management services. (I do not hold the above stock)
Buy-in Price: $3.48, Target Price: $3.85, Cut Loss Price: $3.35

It is Asia's largest pharmaceutical R&D service platform based on 2017 revenue, accounting for 1.1% of the global pharmaceutical R&D outsourcing service market. The market share is 8.3% in China. Focusing on the discovery, development and manufacturing of small molecule drugs. It also provides research and development and manufacturing services for cell and gene therapies, accounting for 8.1% and 18.2% of the global and US cell and gene therapy CMO/CDMO market share, respectively. It ranked fourth and second respectively. Interim income in 2019 increased by 33.7% y.o.y. to RMB 5.894 billion. The adjusted net profit increased by 32% y.o.y. to RMB 1.178 billion. The global pharmaceutical market grew at a CAGR of 4.9% from 2013 to 3017 and is expected to grow at a CAGR of 5.7% by 2022. China is the second largest pharmaceutical market in the world. It is expected that the policy will continue to encourage the development of innovative patented drugs in the next five years. It is expected that the generic and patented drugs will grow at a CAGR of 8% by 2022. The cell and gene therapy CMO/CDMO grew at a CAGR of 23.2% from 2013 to 2017 and is expected to grow at a CAGR of 24.2% by 2022.
Buy-in Price: $84.60, Target Price: $90.00, Cut Loss Price: $75.00

SINOPHARM ACCORD (000028.SZ) - Results in line with expectations, revenue remains high growth

Company Update

As of 30 September 2019, the company's revenue was RMB 38.876 billion, representing an increase of 22.38% YoY; net profit attributable to shareholders was RMB 962 million, with a YoY increase of 3.79%; net profit attributable to shareholders excluding non-recurring profit and loss was RMB 943 million, with a YoY increase of 4.14%. In the third quarter, the income was RMB 13.648 billion, showing a YoY increase of 24.21%; net profit attributable to shareholders was RMB 311 million, showing a YoY increase of 9.14%; net profit attributable to shareholders excluding non-recurring profit and loss was RMB 303 million, showing a YoY increase of 7.45%. Business revenue growth continued to accelerate, the reason for which was that business income increased for the good business performance in the period. The profit growth rate is lower than the income growth rate, it is mainly because the company implements new leasing standards, the finance cost increased by RMB 69.57 million (a YoY increase of 88.87%); and the company's subsidiary Guoda Drugstore introduced strategic investors WBA in 2H2018, leading to a YoY increase in minority shareholders` equity of RMB 81.76 million (a YoY growth rate of 97.93%).

The company's performance of core business is basically consistent with our forecast, and the revenue and net profit attributable to shareholders slightly exceeded our expectations. The company expanded the scale, and growth rate was better than the overall level of the industry, and related performance increase in total revenue was mainly contributed by the acceleration of the Wholesale and Retail Integration, better performance of distribution business and expansion of store network layout.

Businesses sustained recovery, Wholesale and Retail Integration showed early results

In the first three quarters of 2019, the company's business continued to recover. The gross profit margin of sales was 10.82%, decreasing 0.67ppt YoY. We expect that this was mainly due to the adjustment of business income structure and the further enhancement of distribution business. With the gradual weakening of the influence of the introduction of strategic investors on minority shareholders` interests, the retail business continues to expand and the “Guoda” brand upgrades to “Guozhi” brand integration plan continues to advance, we expect the company will further increase profitability next year. In the first three quarters of 2019, the company's expense level was further reduced to 7.54%, decreasing 0.59ppt YoY; the selling expense rate was 5.78%, decreasing 0.38ppt YoY; the administration expense rate was 1.51%, decreasing 0.2ppt YoY; we expect it is mainly because the influence of the "two-invoice system" has gradually been reflected, and the company promotes "integration of wholesale and retail" to effectively control costs and reduce the period expense. The company's finance cost rate was 0.38%, showing an increase of 0.13ppt YoY. This was mainly due to the implementation of the new leasing standards, during the lease terms, interest expenses shall be calculated according to the discount rate forlease liabilities. The net interest expense increased by RMB 69.5683 million, the growth rate was 88.87%. In addition, the net cash flows from operating activities increased RMB 509 million on a YoY basis with growth rate of 90.24%. We expect it is mainly due to the increase in revenue, the improvement of operation efficiency and GPO policy, and also due to the implementation of new leasing standards in the period, the rents paid in the period are reckoned into cash paid with other financing activity concerned.

In the first half of 2019, the distribution launched the logistics planning of wholesale and retail integration, the hospital direct selling market distributed in 30 cities at prefecture level and above in Guangdong and Guangxi ranked the top three; the distribution of customers was mainly including retail medical treatment, grass-root medical institutions, and small-scale social medical services: 1,804 medical institutions at the first level or above, 3,783 primary care customers (excluding 836 first-level hospitals), and 1,587 retail terminal customers (chain drugstores, single tores). In the pharmaceutical retail field, Guoda Drugstore is a pharmaceutical retail enterprise that ranks the first in the sales volume throughout the country, and is one of the few enterprises in China with national direct sales drug retail network. As of the end of June 2019, Guoda Drugstore had established 28 regional chain enterprises, had 4,593 stores, covering 19 provinces, autonomous regions, and municipalities directly under the central government, which formed a network of pharmacies covering the urban agglomerations of East China, North China, and coastal region of South China, and gradually spread into the Northwest, Central Plains, and inland city clusters; 3,470 direct-operated stores, 1,123 franchise stores. In addition, Guoda Drugstore built an Internet + medical e-commerce model, improved the value-added service system, optimized the self-operated OTO platforms such as WeChat Mall and APP, created a pharmacy + Internet O2O model, enhanced the front-end customer experience, and launched the e-commerce national customer service. In the first half of 2019, the number of effective members nationwide was 11.436 million, an increase of 8% YoY.

Financial Forecast and Valuation

We adjust the company's revenue in FY19/FY20/FY21 to be RMB 51.8/57.0/62.8 billion, representing increases of 20.20%/10.02%/10.09% YoY; gross profit will be RMB 5.9/6.5/7.3 billion, representing increases of 14.95%/11.37%/11.50% YoY; net profit attributable to shareholders will be RMB 1.3/1.6/1.8 billion, representing increases of 8.45%/18.39%/17.34% YoY; corresponding EPSs are RMB 3.067/3.631/4.261. Based on our residual income valuation model, we adjust a TP of RMB 54.90, corresponding to FY19/FY20/FY21 17.90x/15.12x/12.89x PE with a +25.06% potential upside compared with CP of RMB 43.90 as of October 25, 2019, we upgrade from “ACCUMULATE” to “BUY” investment rating.


Industry policy risk;

Guoda Drugstore's business fails expectations;

Distribution business transformation fails expectations.


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Recommendation on 31-10-2019
Price on Recommendation Date$ 43.900
Suggested purchase priceN/A
Target Price$ 54.900
Writer Info
Leon Duan
(Research Analyst)
Tel: +852 2277 6515

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