China Healthcare:Takeaways from DB conference/tour;executive
2017 – Hengrui and Sino Biopharm.
Four blockbusters are likely to be approved including nab-paclitaxel, 19K,pyrotinib and PD-1. Hengrui commented on bigger addressable market forpyrotinib vs. apatinib, on the back of longer treatment duration, without offeringany color on pricing strategy. On nab-paclitaxel, Hengrui and CSPC are both onpriority review list, with the possibility of obtaining approvals simultaneously. Asfor R&D spending, the ratio is likely to remain at current level, as expense increasewill synchronize with sales growth. On management incentive, the companyimplemented 3 rounds in 2014/16/17, with near-term plan of another round, using3m reserved shares.
Hikvision recently announced its “AI cloud” framework at the 16th publicsafety expo in Shenzhen. Its strategy focuses on edge cloud for videosurveillance applications, which allows faster responses and the filtering ofunnecessary data from video/images captured by millions of camerasconstantly. In addition to domestic transportation and security projects,Hikvision has won a smart city project in Singapore of over USD10mn. Theincreasing adoption of AI presents upside risks to revenue and margins.
From a valuation perspective, we believe most of the near-term catalysts havebeen reflected for large-cap stocks while new mid/long-term risks are likely toemerge. On fundamentals, while we could still identify meaningful differencesin selective mid/long term growth drivers on a qualitative basis, we see feweropportunities for consensus revisions of 2018 numbers. While it would bechallenging to predict the sustainability of a large-cap stock rally, we now believelaggards may have more chances to outperform. We highlight Jointown andUniversal Medical as our top picks. We also like IHH at this point.
Solid growth to continue with multiple catalysts ahead.
We reiterate our Buy rating on Hikvision and raise our target price to CNY43from CNY34.5, as we raise our earnings forecast and lift the target multiple to30x from 25x, driven by our expectation of accelerated earnings growth due tomargin expansion.
DB view: more challenging to identify delta vs. consensus estimates.
We believe the indications are cHL and esophageal cancer, which is earlier thanstreet consensus. This led to stock rally on Tuesday. Additionally the companyexpects approval in 2018; 2) Hengrui expects growth acceleration in 2018. Webelieve this might be a combination of delayed booking of export profit andother unspecified elements. For 2017, Hengrui reiterated 18-20% domestic salesgrowth and 20% exports growth. As for the products breakdown, traditionaloncology/ anesthetics/ contrast agents should reach 10-15%, 20% and over 30%growth respectively in 2017. In addition, lower pricing erosion could be witnessedin FY18 compared with FY17, as secondary negotiations and tenders are largelyconcluded.
Positive progress in the innovation business
We hosted executives from 18 listed companies during the DB conferenceand tour this week. Most executives remain constructive for 2018 and, despitethe stock rally, have not become more bullish or bearish vs. 1H17. Additionaltakeaways: 1) most expect an acceleration of drug approvals and benefits fromNRDL inclusion, although their views on the exact timeline of the latter weremixed; 2) their expectations of the pricing/volume trends after BE were mixed.
The company indicated that apatinib sales was below expectation in 2017,due to slowdown in 4Q17 stemming from NRDL settlement/ implementationdelays and budget controls. Hengrui remains optimistic on 2018 outlook drivenby reimbursement coverage. Despite the 36% nominal ASP cut of apatinib,management believes the upside could very well outweigh pricing erosion. Assuch, management welcomes negotiations for NRDL/ PRDL rolling inclusionfor key innovative products. In addition, indication expansion studies for livercancer and NSCLC are both progressing to final stages, with approval expectedin 2H18-2019.
We have been highlighting Hikvision’s margin expansion through a risingsolution business and management efforts. 3Q17GPM of 46% is a high since2015, above DB/consensus expectations of 42%. As Hikvision continues topursue solution business opportunities in overseas markets and its domesticmarket continues to improve, we expect the company to sustain the 2017margin expansion into 2018/2019at 44%.
DB proprietary executive survey on the 2018 outlook.
Apatinib growth likely to accelerate in 2018; 4Q17 hiccup.
Hikvision’s share price has appreciated over 150%+ YTD (vs. ShenzhenComposite index: 2%). We expect it to continue re-rating, given acceleratedprofit growth from AI exposure, rising innovation contributions, and marginimprovement. Our new target price of CNY43is based on 30x FY2018E PE,which lies toward the top end of the company’s historical trading range, andwould be supported by an accelerated 34% profit CAGR in 2017-2019E,compared to a 26% profit CAGR in 2014-2016. Risks: market share loss, weakdemand in industry project orders (see page 8-10, for details).
Anticipate stable delivery in 2018; Hengrui/SBP guided growth acceleration.
Updates on pipeline and other key takeaways.
AI strategy focuses on edge cloud computing
We conducted our annual survey of executives from 16 listed companies to gaugeviews of key policies and sector catalysts. We highlight the following results: 1)on whether the executives have changed their views on the sector growth outlookin 2018 vs. 1H17, 37% indicated no change. We concur and remind investors thatthe fundamentals have not changed despite the significant stock rally; 2) on thegrowth outlook for the distribution sector, 2 distributor bellwethers voted 7-8%,one expected a high single digit and another said 6-7%, vs. 7.8% growth in 1H17;3) on the timeline of the NRDL benefit on drug growth, the feedback was mixed,with 25% being uncertain; 4) on an acceleration of regulatory approvals in 2018,56% of the executives expected one; 5) on the pricing trend after the BE study,the responses were mixed as well, with 25% anticipating a price erosion and 44%expecting stable prices.
The two key take-aways include 1) Hengrui already filed PD1 application in 4Q17.
Valuation and risks
We will host a teleconference on DB conference takeaways at 9:30am HKT,January 15. Dial-in: +852 3051 2792, conference ID: 4595967, passcode: DBJC18.
Buy rating with new target price of CNY43
We highlight that only two companies guided a growth acceleration for 2018 vs.
In addition to AI, the innovation business is a growth catalyst at Hikvision. Thelargest contributor is Ezviz, whose subscribers exceed 20mn. In addition to aconsumer client base, it has business clients, such as retail chain and propertymanagement companies, which utilize the Ezviz cloud to track client traffic andmonitor premises. Its robot business has landed orders for three types ofrobots for JD.com’s automated warehouse in Shanghai. We expect theinnovation business to grow 142%/83% in 2017/2018.
Better-than-expected margin expansion and outlook
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