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A-share research
Monday, 10 November, 2014 Bringing China to the World Zhejiang Huahai Pharmaceutical (600521:CH)
Unchanged
Zhejiang Huahai Pharmaceutical Co Ltd
Seeking approval
Sector: Health Care
Industry: Pharmaceuticals
Sub-Industry: Pharmaceuticals
Zhejiang Huahai Pharmaceutical received prior approval supplement (PAS) from the US Food and Drug Administration (FDA) to order to provide bulk pharmaceutical chemicals (BPC) to its lisinopril preparation products. Market Cap (Rmbm) Lisinopril tablets are one of the top 20 generic drugs in the US market, with Indian Market Cap (US$m) company Lupin (LPC:IN) occupying the largest market share over the past few years. Shares outstanding (m) Despite Zhejiang Huahai Pharmaceutical's purchase of the abbreviated new drug application (ANDA) of lisinopril tablets, this was challenged by Lupin due to high costs generated by its European BPC supplier. Having acquired the PAS, we expect the company Dividend yield (FY13) to reduce its costs and regain its market share from Lupin in the US, where Zhejiang Huahai Pharmaceutical has established a mature business model. In addition, in a bid to reduce its costs, the company has changed suppliers for other BPC including levetiracetam Inst Ownership (Top 5)
and lisinopril tablets. Before the FDA launched new standards of BPC in June 2014, generic pharmaceutical PICC PROPERTY & CASU manufacturers submitted a numerous ANDAs. As a result, many generic drugs were listed on the apparaisals queue and the US market experienced supply shortages of related Source: Bloomberg drugs. According to its application schedule, we believe Zhejiang Huahai Pharmaceutical is likely to receive several ANDA approvals for risperidone, bupropion hydrochloride sustained-release tablets over the next three to six months. This represents potential earnings growth in 15E. Due to production limitations in the company's industrial park, BPC processing experienced a setback in 9M14. However, we expect this to ease in 4Q14. Successful exports of lamotrigine prove the company's mature overseas business model. With more approvals, we forecast increasing preparation exports. We forecast EPS of Rmb0.41 (-11% YoY) in 14E, Rmb0.51 (+26% YoY) in 15E and Rmb0.66 (+28% YoY) in 16E. The stock is trading at 37x 14E PE, 29x 15E PE and 23x 16E PE. Maintain BUY. Financial Table
Operating revenue Gross margin (%) Source: SWS Research Source: Bloomberg A-share research
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