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本研究报告仅通过邮件提供给国投瑞银国投瑞银基金管理有限公司([email protected]) 使用。1

Pharmaceuticals, Biotechnology & Life | Company Bringing China to the World

SWS Research Co. Ltd 99 East Nanjing Road, Shanghai | +86 21 2329 7818 www.swsresearch.com

08 January 2016

Hold Downgrade

业绩疲弱 THE UNITED LABORATORIES INTERNATIONAL HOLDINGS (3933:HK)

Market Data: January, 07

Closing Price (HK$) 4.72

Price Target (HK$) 3.70

HSCEI 8,753

HSCCI 3,694

52-week High/Low (HK$) 6.37/3.09

Market Cap (US$m) 810

Market Cap (HK$m) 6,280

Shares Outstanding (m) 1,627

Exchange Rate (Rmb-HK$) 1.18

Price Performance Chart:

Source: Bloomberg

Analyst

Jill WU

A0230514080002

AXT645

[email protected]

(8621)23297269

Related Reports "Bottoming out – The United Laboratories (3933:HK)" August 18,2015 "Overhang removed – The United Laboratories (3933:HK)" August 13,2015

Financial summary and valuation 2013 2014 2015E 2016E 2017E

Revenue (HK$ m) 7,648.44 8,029.84 7,857.00 8,283.35 8,777.69 YoY (%) 8.93 4.99 (2.15) 5.43 5.97 Net income (HK$ m) 48.04 681.09 321.43 350.96 463.70 YoY (%) (70.34) 1,317.85 (52.81) 9.19 32.13 EPS (HK$) 0.03 0.42 0.20 0.22 0.29 Diluted EPS (HK$) 0.03 0.42 0.20 0.22 0.29 ROE (%) 0.74 9.77 4.41 4.62 5.83 Debt/asset (%) 66.93 63.16 60.93 59.06 56.82 Dividend Yield (%) 0.00 0.00 0.00 0.84 1.48 PE (x) 130.85 9.22 19.54 17.89 13.54 PB (x) 0.97 0.90 0.86 0.83 0.79 EV/Ebitda (x) 7.17 6.56 6.36 6.02 5.24 Note: Diluted EPS is calculated as if all outstanding convertible securities, such as convertible preferred shares, convertible

debentures, stock options and warrants, were exercised.

中间体业务利润率下滑。6-APA 是制造青霉素类抗生素药的主要原料。422 家样本医院

的销售数据显示，青霉素类抗生素药在 15 年前三季度的销售额同比下跌 12%，而抗生

素药整体销售收入于同期同比上升 6%。我们认为青霉素类抗生素药由于价格过低，正在

被头孢类、碳青霉烯类等高端抗生素类药替代。由于终端需求较弱，6-APA 的销售均价

从 15 年上半年的 180-185 元/公斤下跌到了 15 年下半年的 160-165 元/公斤。价格下滑

趋势仍在持续，售价已经在 15 年年底跌倒了 150-155 元/公斤，触及过去 5 年的最低

点。考虑到玉米、煤炭等原材料成本的下降以及产能利用率的降低，我们估计公司 6-

APA 业务的经营利润率将有 15 年上半年的 22%下降至 15 年下半年的 2%。

甘精胰岛素或存不确定性。在此轮临床试验数据自查核查工作中，联邦制药共有 9 项药

品申请被要求进行核查，其中包括甘精胰岛素。截至 15 年年底，公司已经撤回了除甘精

胰岛素以外的其余 8 项药品申请。由于 CFDA 在此轮核查中坚持比较高的检查标准，我

们认为甘精胰岛素的获批时间存在不确定性。我们不排除公司将来会主动撤回此项申

请。最坏情况下， CFDA 在核查中可能因为临床实验数据不完整或者不真实的问题拒绝

批准该项申请。假设公司选择撤回，我们认为公司仍然会在补做临床以后重新进行甘精

胰岛素的申报工作。我们最新的财务模型将甘精胰岛素的预计获批时间由 2016年推迟到

了 2017 年。此外，我们预期重组人胰岛素的销售额于 15年达到 3.85亿港币，同比上升

77%。

预期 15年下半年业绩疲弱。我们预计中间体（主要是 6-APA）的销售收入于 15 年下半

年同比下滑 25%，原料药收入同比下滑 20%。考虑到政府加大对于精神类药品销售的管

控力度以及招标降价的影响，我们预计制剂收入于 15 年下半年基本持平。我们预计核心

净利润于 15 年同比下滑 13%，于 16 年同比下滑 14%，并于 17 年同比上涨 27%。

下调评级至中性。公司目前估值为 15 年 20 倍市盈率，16 年 18 倍市盈率。根据分部加

总估值法，我们将目标价由 6.2港币下调至 3.7港币，对应 17倍 16年市盈率、0.8 倍 16

年市净率以及 4%的下降空间。

The company does not hold any equities or

derivatives of the listed company

mentioned in this report (“target”), but then

we shall provide financial advisory services

subject to the relevant laws and

regulations. Any affiliates of the company

may hold equities of the target, which may

exceed 1 percent of issued shares subject

to the relevant laws and regulations. The

company may also provide investment

banking services to the target. The

Company fulfills its duty of disclosure within

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contact [email protected] for

relevant disclosure materials or log into

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column for further information. The clients

shall have a comprehensive understanding

of the disclosure and disclaimer upon the

last page.

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The United Laboratories

Hang Seng China Ent Index


October 12, 2010 Building Materials | Company Research

Please refer to the last page for important disclosures Page 1

January 12,2015 Food, Beverage & Tobacco | Company Research

08 January 2015 Pharmaceuticals, Biotechnology & Life | Company Research

Investment Highlights: Sluggish demand for penicillin drugs may cause United Labs’ sales of intermediates to drop 25% YoY in 2H15E; meanwhile, we expect bulk medicine sales to decline 20% YoY in 2H15E. We forecast flat sales of finished drugs in 2H15E due to tightening regulation on psychotropic drug sales and lower prices in government procurement tenders. Factoring in a potential one-off impairment loss from the company’s investment properties in Chengdu and weak 6-APA performance, we lower our earnings forecasts for United Labs.

Intermediates margins shrink. In 9M15, penicillin drug sales in 422 sample hospitals shrank 12% YoY while the overall anti-infection drug sales grew 6% YoY during the same period. We think the low selling price for penicillin drugs not only hurts manufacturers’ willingness to produce due to thin margins but also undermines doctors’ motivation in prescribing penicillins due to low kickbacks. With demand weak, average prices of 6-APA declined from Rmb180-185/kg in 1H15 to Rmb160-165/kg in 2H15. As of end-2015, 6-APA is selling at Rmb150-155/kg, the lowest level in the past five years. Factoring in the decrease in raw material costs and declining utilisation, we forecast United Laboratories’ operating margin for 6-APA to drop from 22% in 1H15 to 2% in 2H15E. Insulin glargine uncertainties. The China Food and Drug Administration (CFDA) ordered clinical data reviews for nine of United Lab’s pending drug applications, including its insulin glargine. As of end-2015, except insulin glargine, the remaining eight applications were withdrawn by the company. Given the tighter scrutiny over clinical trials data, we there is a risk that United Labs may withdraw insulin glargine or the CFDA may reject the drug if problems in the clinical trial data are found during the inspections. We revise our model, rolling back our assumption that insulin glargine is approved in 2016 to 2017. We estimate that the company’s 2015E recombinant human insulin sales reached HK$385m (+77% YoY). Downgrade to Hold. We forecast core earnings to decline by 13% YoY in 15E and 14% YoY in 16E, although we see growth rebounding 27% YoY in 17E. We lower our earnings forecasts from HK$622m to HK$321m (-53% YoY) in 15E, from HK$716m to HK$351m (+9% YoY) in 16E and from HK$836m to HK$464m (+32% YoY) in 17E. The company is trading at 20x 15E PE and 18x 16E PE. Based on our sum-of-the-parts valuation, we cut our target price from HK$6.2 to HK$3.7, implying 17x 16E PE. With 4% downside, we downgrade the stock from BUY to Hold.






Weakening intermediates business 6-APA is mainly used to produce penicillin drugs, a major category of anti-infection drugs. In the first nine months of 2015, sales of penicillin drugs in 422 sample hospitals shrank by 12% YoY while the overall anti-infection drug sales grew by 6% YoY during the same period.

Figure 1: Weak sales performance of penicillin type drugs (1Q06-3Q15)

Source: Pharma Database, SWS Research

We think penicillin drugs are substituted by other anti-infection drugs such as cephalosporins and carbapenems because of the depressed selling price of penicillin drugs.

For instance, the daily treatment cost of amoxicillin capsule, a major type of penicillin drug, is c.Rmb3, which is much lower than that of cefdinir capsule (Rmb14) and faropenem tablet (Rmb30). The low price not only impacts manufacturers’ willingness to produce penicillin drugs but also depresses doctors’ motivation to prescribe them due to the low kickbacks available.

Figure 2: Treatment cost comparison of anti-infection drugs

Category Generic name Manufacture Package

Average bid

price (Rmb, 2015)

Daily treatment

cost (Rmb)

Penicillin Amoxicillin capsule 阿莫西林胶囊 TUL 250mg*24 capsules 12 3

Cephalosporin Cefdinir capsule 头孢地尼胶囊 Hansoh 100mg*10 capsules 46 14

Carbapenem Faropenem tablet 法罗培南片 Lunan Beite 200mg*12 tablets 121 30

Source: Yaozhi.com, SWS Research

Due to weak demand, average prices of 6-APA declined from Rmb180-185/kg in 1H15 to Rmb160-165/kg in 2H15. As of end-2015, 6-APA is selling at Rmb150-155/kg, the lowest level in the past five years

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Figure 3: 6-APA price (2009-15)

Source: WIND, SWS Research

Besides sluggish demand, the decrease in production cost also explains the decrease in 6-APA price. We estimate that the production cost of 6-APA mainly consists of corn starch (c.33%), coal (c.33%), other variable costs (15%) and overheads (18%). The average price of corn starch decreased by 13% HoH in 2H15 while coal price dropped by 15% HoH. In addition, as the production of 6-APA was suspended for more than 30 days in July and August 2015, we assume the capacity utilization rate declined from 85% in 1H15 to 55% in 2H15E.

For TUL, we estimate its average selling price (excluding VAT) of 6-APA is Rmb133/kg in 2H15E, down from Rmb151/kg in 1H15. Factoring in the decrease in raw material costs and the decline in utilization rate, we estimate the operating margin of 6-APA to drop from 22% in 1H15 to 2% in 2H15E.

Figure 4: Corn starch price (2012-16)


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Figure 5: Coal price (Qinhuangdao, 2012-16)


Figure 6: Assumptions on 6-APA business

(Rmb per kg) 1H15 2H15E

Selling price (excl. VAT) 150.7 133.2

Total CoGS 118.1 118.9

- Corn Starch 39.4 34.3

- Coal 39.4 33.5

- Other variable costs 17.7 17.7

- Overheads 21.7 33.5

Capacity unitization rate 85.0% 55.0%

Gross profit 32.6 14.3

SG&A 11.5 11.5

EBIT 21.1 2.8

EBIT margin 14.0% 2.1%

Source: Company data, SWS Research

Insulin glargine faces uncertainties The CFDA required 1,622 drug applications to go through clinical trial data verifications from 22 July 2015. Of TUL’s applications, nine, including insulin glargine, were ordered for review. As of 31 December 2015, eight of the nine applications have been withdrawn by the company due to the incomplete or falsified clinical trial data. Insulin glargine is the only application still pending inspection. TUL still has a chance to withdraw the drug before the CFDA initiates inspections of the data.

The CFDA has imposed stringent standards during this round of inspections. Of the 1,622 applications, 60% have already failed (voluntarily withdrawn or rejected by the CFDA), as of end-2015. Of the remaining 40%, we still see a significant number of failures as likely.

We therefore see risk that TUL may withdraw its application for insulin glargine or that the CFDA may reject the application if problems are found in the clinical trial data. If the insulin glargine application is withdrawn, we expect TUL to conduct supplementary clinical trials and reinitiate the application process at a later date.

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We conservatively revised our model based on the assumption that insulin glargine will be approved in 2017 (versus our previous assumption of 2016). We estimate the recombinant human insulin sales to reach HK$385m in 15E (+77% YoY), HK$578m in 16E (+50% YoY) and HK$780m in 17E (+35% YoY). Meanwhile, we expect insulin glargine to contribute HK$114m of sales in 17E, which makes the total sales of insulin products to reach HK$895m in 17E (+55% YoY).

Figure 7: Insulin sales (2011A-17E)


2H15 earnings under pressure We expect sales of intermediates (mainly 6-APA) to drop by 25% YoY in 2H15E mainly due to the selling price decrease and weak demand. Similarly, we forecast sales of bulk medicine to decline by 20% YoY in 2H15E. The authorities has tightened the regulations of sales of psychotropic drugs such as codeine in 2015, which brought negative impact on the sales of TUL’s two cough medicines, Keli’an and Xintailuoqi. We estimate finished drug sales to be largely flattish in 2H15E due to both regulatory impact and bid price cuts.

Figure 8: Key financial assumptions

1H14 2H14 2014 1H15E 2H15E 2015E

Revenue change (YoY) -1.2% 10.9% 5.0% 9.8% -12.4% -2.2%

- Intermediates -11.3% 4.7% -2.3% 33.1% -25.0% -1.9%

- Bulk medicine 17.9% 10.0% 13.9% -13.9% -20.0% -16.9%

- Finished drugs 6.5% 9.4% 8.0% 3.4% -0.5% 1.4%

Gross margin 41.6% 39.0% 40.2% 40.3% 36.0% 38.2%

Net margin 19.2% -0.7% 8.5% 6.9% 1.1% 4.1%

Core earnings change (YoY) 179.8% -32.1% 35.5% 4.1% -45.5% -12.8%


We forecast TUL’s core earnings to decline by 13% YoY in 15E and 14% YoY in 16E while grow by 27% YoY in 17E. Factoring in potential one-off impairment loss from the investment properties located in Chengdu and the weak performance of 6-APA business, we trim our earnings forecasts from HK$622m to HK$321m (-53% YoY) in 15E, from HK$716m to HK$351m (+9% YoY) in 16E and from HK$836m to HK$464m (+32% YoY) in 17E.

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Figure 9: Comparable peers of TUL

Company Code Rating Market

cap (US$m)

15E PE 16E PE 15E PB 15E ROE 15E

EV/Ebit

The United Laboratories

3933 HK Neutral 810 19.5 17.9 0.9 4.4 11.9

HK listed peers

CSPC Pharmaceutical

1093 HK BUY 6,031 27.5 22.3 5.1 18.9 20.8

Livzon Pharmaceutical

1513 HK BUY 2,442 18.5 15.6 2.5 13.6 16.2

HK peer average 23.0 18.9 3.8 16.2 18.5

China listed peers

Tonghua Dongbao Pharmaceutical

600867 CH

N-R 3,973 62.5 46.6 9.5 17.1 49.2

Sichuan Kelun Pharmaceutical

002422 CH

N-R 3,427 21.2 17.8 1.3 7.3 NA

Zhejiang Hisun Pharmaceutical

600267 CH

N-R 1,958 86.3 48.6 1.9 0.4 NA

China peer average

56.7 37.7 4.2 8.3 49.2

Source: Bloomberg, SWS Research Note: We use Bloomberg consensus for non-rated stocks

TUL is trading at 20x 15E PE and 18x 16E PE, while its HK listed peers are trading at an average valuation of 23x 15E PE and 19x 16E PE, and its A-share peers trading at 57x 15E PE and 38x 16E PE.

Based on our SOTP valuation, we cut our target price from HK$6.2 to HK$3.7, implying 17x 16E PE and 0.8x 16E PB. With 4% downside, we downgrade the stock from BUY to Hold.

Figure 10: SOTP valuation of TUL

SOTP Valuation

Finished drug business 2016E

Target EV/Ebit of finished drug business 13.00

2015E EBIT (HK$m) 541

Target EV (HK$m) 7,037

Bulk medicine business

Target EV/Ebit of bulk medicine business 7.00

2015E EBIT (HK$m) 433

Target EV (HK$m) 3,034

Total EV (HK$m) 10,072

Net debt (HK$m) 4,025

Total market cap (HK$m) 6,046

Target share price (HK$) 3.7

Source: SWS research






APPENDIX

Consolidated Income Statement

Consolidated Cash Flow Statement

(HK$m) 2013 2014 2015E 2016E 2017E

Profit before taxation 901 664 314 468 618

Plus：Depr. and amortisation 575 713 811 811 811

Finance cost 201 372 335 300 266

Losses from investments (547) 426 0 0 0

Change in working capital 443 194 (57) (173) (235)

Others (94) (536) (18) (142) (180)

CF from operating activities 1,479 1,832 1,385 1,264 1,281

CAPEX (2,046) (692) (500) (500) (200)

Other CF from investing activities 467 (459) 25 25 25

CF from investing activities (1,579) (1,151) (475) (475) (175)

Equity financing 0 0 0 0 0

(HK$m) 2013 2014 2015E 2016E 2017E

Revenue 7,648 8,030 7,857 8,283 8,778

Cost of Sales (5,011) (4,801) (4,853) (5,094) (5,267)

Gross Profit 2,638 3,228 3,004 3,189 3,511

Other Income 78 509 55 0 0

Selling/General/Admin. Expenses (1,231) (1,252) (1,287) (1,392) (1,510)

EBITDA 1,677 1,749 0 0 0

EBIT 1,102 1,036 0 0 0

Finance Costs (201) (372) (335) (300) (266)

Profit before tax 901 664 314 468 618

Income tax expense (853) 18 7 (117) (155)

Minority interests 0 0 0 0 0

Profit for the year 48 681 321 351 464







Net change in liabilities 1,371 (409) (600) (600) (600)

Dividend and interest paid (440) (472) (335) (352) (359)

Other CF from financing activities (418) 136 0 0 0

CF from financing activities 513 (745) (935) (952) (959)

Net cash flow 413 (64) (24) (164) 147

FCFF (779) 1,268 261 21 222

FCFE 391 487 (673) (879) (644)







Consolidated Balance Sheet

(HK$m) 2013 2014 2015E 2016E 2017E

Current Assets 6,542 6,624 6,676 6,864 7,373

Bank balances and cash 1,081 1,003 979 815 962

Trade and other receivables 3,291 2,982 3,014 3,223 3,487

Inventories 1,272 1,418 1,463 1,605 1,703

Other current assets 898 1,221 1,221 1,221 1,221

Long-term investment 2,320 1,634 1,634 1,634 1,634

PP&E 9,807 9,617 9,317 9,017 8,417

Intangible and other assets 931 1,043 1,032 1,021 1,010

Total Assets 19,600 18,918 18,660 18,536 18,435

Current Liabilities 9,863 8,914 8,334 7,912 7,440

Borrowings 4,998 4,558 3,958 3,358 2,758

Trade and other payables 4,275 3,570 3,590 3,768 3,896

Other current liabilities 590 786 786 786 786

Long-term liabilities 3,256 3,035 3,035 3,035 3,035

Total Liabilities 13,118 11,949 11,369 10,947 10,475

Minority Interests 0 0 0 0 0

Shareholder Equity 6,482 6,969 7,291 7,589 7,960

Share Capital 16 16 16 16 16

Reserves 6,466 6,953 7,274 7,573 7,944

Total Equity 6,482 6,969 7,291 7,589 7,960

Total Liabilities and equity 19,600 18,918 18,660 18,536 18,435







Key Financial Ratios

2013 2014 2015E 2016E 2017E

Ratios per share (HK$)

Earnings per share 0.03 0.42 0.20 0.22 0.29

Diluted EPS 0.03 0.42 0.20 0.22 0.29

Operating CF per share 0.91 1.13 0.85 0.78 0.79

Dividend per share 0.00 0.00 0.00 0.03 0.06

Net assets per share 3.98 4.28 4.48 4.66 4.89

Key Operating Ratios(%)

ROIC 3.85 1.60 (0.11) 0.96 2.05

ROE 0.74 9.77 4.41 4.62 5.83

Gross profit margin 34.49 40.20 38.23 38.50 40.00

EBITDA Margin 21.93 21.78 0.00 0.00 0.00

EBIT Margin 14.41 12.90 0.00 0.00 0.00

Growth rate of Revenue(YoY) 8.93 4.99 (2.15) 5.43 5.97

Growth rate of Profit(YoY) (70.34) 1317.85 (52.81) 9.19 32.13

Debt-to-asset ratio 66.93 63.16 60.93 59.06 56.82

Turnover rate of net assets 1.18 1.15 1.08 1.09 1.10

Turnover rate of total assets 0.39 0.42 0.42 0.45 0.48

Effective tax rate (%) 94.67 (2.64) (2.29) 25.00 25.00

Dividend yield (%) 0.00 0.00 0.00 0.84 1.48

Valuation Ratios (X)

P/E 130.85 9.22 19.54 17.89 13.54

P/B 0.97 0.90 0.86 0.83 0.79

EV/Sale 1.57 1.43 1.39 1.26 1.11







Information Disclosure： The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst I (We) am (are) conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China and have registered as the Securities Analyst. I hereby issue this report independently and objectively with due diligence, professional and prudent research methods and only legitimate information is used in this report. I am also responsible for the content and opinions of this report. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Disclosure with respect to the Company The company is a subsidiary of Shenwan Hongyuan Securities. The company is a qualified securities investment consulting institute approved by China Securities Regulatory Commission with the code number ZX0065. Releasing securities research reports is the basic form of the securities investment consulting services. The company may analyze the values or market trends of securities and related products or other relevant affecting factors, provide investment analysis advice on securities valuation/ investment rating, etc. by issuing securities research reports solely to its clients. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials or log into www.swsresearch.com for the analysts' qualifications，the arrangement of the quiet period and the affiliates’ shareholdings. Introduction of Share Investment Rating Security Investment Rating： When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period. BUY: Share price performance is expected to generate more than 20% upside over a 12-month period. Outperform: Share price performance is expected to generate between 10-20% upside over a 12-month period. Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period. Underperform: Share price performance is expected to generate between 10-20% downside over a 12-month period. SELL: Share price performance is expected to generate more than 20% downside over a 12-month period. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market；

Equal weight： Industry performs about the same as that of the whole market；

Underweight：Industry performs worse than that of the whole market. We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification is available at our sales personnel if you are interested. HSCEI is the benchmark employed in this report.

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Distribution in Singapore If distributed in Singapore, this report is meant only for Accredited Investors and Institutional Investors as defined under Section 4A of the Securities and Futures Act of Singapore. If you are not an Accredited Investor or an Institutional Investor, you shall ignore the report and its contents. The Singapore recipients of the report are to contact the Singapore office of Shenwan Hongyuan Singapore Private Limited at 65-6323-5208, or 65-6323-5209 in respect of any matters arising from, or in connection with, the report.

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