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Investor Notes - Phillip Securities (HK) Ltd
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21 Jan, 2020 (Tuesday)

            
TRAD CHI MED(570)
Analysis¡G
China Traditional Chinese Medicine Holdings (570) is principally engaged in the research and development, manufacture and sale of finished drugs, concentrated TCM granules and TCM decoction pieces. Two years ago ,the Group started to implement a five-year strategy of ¡§building a leading comprehensive TCM healthcare industrial group¡¨ by adopting the following strategies : to build a national layout and promote the local TCM integrated operation; to establish the whole industry chain standards; to implement entire industry chain synergy and a comprehensive diversified marketing strategy; to optimize the management and control model to ensure high quality development. In December 2019, the Group acquired 51% equity interest of Longzhong Pharmaceutical. The acquisition will help the Group enter into the market of hospital-made formula manufacture. On the other hand, it is beneficial to further strengthen the competitiveness of the Group on concentrated TCM granules, TCM finished drugs, and TCM decoction pieces business, so as to achieve the full TCM supply chain lay out of the Group in Gansu province. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $4.10, Target Price: $4.60, Cut Loss Price: $3.85


AK MEDICAL(1789)
Analysis¡G
As the first company that has commercialized the application of 3D-printing technology in orthopedic joint and spine implants, AK Medical Holdings Limited engages in the design, development, manufacture and marketing of orthopedic implants, leading the market in China. As of 30 June 2019, the company achieved a sales revenue of RMB437.8 million, representing an increase of 59.2% YoY. Net profit of RMB129.6 million was achieved, representing an increase of 81.5% YoY. On 4 July 2019, National Medical Products Administration and National Health Commission jointly published the Notice in relation to Provisions on the Supervision and Administration of Customized Medical Devices (Trial) effective from 1 January 2020. AK Medical is the first company who filed 3D-printing customized prosthesis in Beijing Medical Products Administration since the effect. In the future, the company will consider 3D-printing technology as the driver of the business, and develop multiple orthopedic business lines.
Strategy¡G
Buy-in Price: $12.00, Target Price: $13.50, Cut Loss Price: $11.00



CMS (867.HK) - Innovative Development and Transformation Continues

Project Update

The company recently issued announcements on the progress of various businesses: 1. On 13 January 2020, Neurelis announced that the U.S. FDA had approved its product VALTOCO (diazepam nasal spray) as an acute treatment of intermittent, stereotypic episodes of frequent seizure activity (i.e., seizure clusters, acute repetitive seizures) that are distinct from a patient's usual seizure pattern in people with epilepsy 6 years of age and older. Moreover, the company has been actively carrying out the regulatory application and other related work of VALTOCO in China since Neurelis submitted the NDA to the U.S. FDA, and has recently acquired the clinical trial notice of diazepam nasal spray from the National Medical Products Administration of China. The company is required to conduct a comparative pharmacokinetic study in Chinese subjects, and to submit a post-marketing study plan to further verify the efficacy and safety at the same time of submitting the NDA. 2. The company has signed a Collaboration Agreement on 5 December 2019 with Cambridge Judge Business School (CJBS) and AstraZeneca, and it will invest in the UK biotech and life sciences sectors over the next five years. Since 2015, AstraZeneca has played a role in mentoring biotech and life sciences researchers and innovators and has partnered with CJBS on various programs to promote enterprise and support entrepreneurship amongst life sciences researchers and students. Through the Collaboration Agreement, the company, AstraZeneca and CJBS demonstrate a common objective of strengthening the pipeline of opportunities in biotech and life sciences, more specifically in the areas of therapeutics, diagnostics, devices and digital health, thus providing the invested companies with greater access to international markets in particular Greater China. 3. The company signed a License Agreement with Sun Pharma Advanced Research Company Ltd. (SPARC) for five innovative products on 5 November 2019. The company gained an exclusive license with the right to grant sublicenses to develop and commercialize the products in Greater China. The initial term of the agreement shall be 20 years from the first commercial sale of the products in the Territory and may be extended for additional 3 years increments conditionally. The five innovative products are: (1) TaclantisTM/PICS, indicated for metastatic breast cancer (MBC), locally advanced or metastatic non- small cell lung cancer (NSCLC) and metastatic adenocarcinoma of the pancreas; (2) XelprosTM Ophthalmic Emulsion, indicated for reduction of elevated intraocular pressure (IOP) in patients with open-angle glaucoma, or ocular hypertension; (3) PDP-716 Eye Drops, proposed for the reduction of elevated IOP in patients with open-angle glaucoma or ocular hypertension; (4) SDN-037 Eye Drops, indicated for eye pain and inflammation after cataract surgery; (5) ElepsiaTM XR Tablet, indicated as adjunctive therapy for the treatment of partial onset seizures in patients 12 years of age and older. 4. The company signed a License and Supply Agreement with Biocon Limited for three generic products on 12 September 2019, and it gained an exclusive license to register and commercialize the products in Greater China. The initial term of the agreement shall be 10 years and may be extended for every fixed period of two years on a product-by-product basis conditionally.

Innovation Research Drives Development

At present, the company's long-term object is focusing on innovation research, actively investing in overseas R&D companies or reaching strategic cooperation with a view to establish an innovative product group with sufficient competitive advantages and market potential to meet China's unmet clinical needs. In the med-term, the company focuses on complex generic drugs and through strategic cooperation with leading overseas generic drug companies, it plans to deploy complex generic drugs with high generic barriers. In the short-term, the company focuses on the distribution of high-quality generic drugs that have been listed overseas, and establishes a generic drug product group that has sufficient market competitiveness, high quality and affordable costs. In addition, the company, as a traditional medicine marketing and promotion enterprise, currently covers more than 57,000 hospitals and medical institutions in its promotion network, covering all provincial administrative regions in China, and basically covering the main departments of tertiary hospitals and secondary hospitals.

Raise TP and Maintain "Accumulate" Rating

We maintain our forecast for company performance growth using DCF model and residual income model to value. Assuming equity cost is 10.65%, debt cost is 5%, and WACC is 10.14%. We get TP of HKD 13.88 and HKD 13.35 respectively. The higher valuation result corresponds to FY19/FY20/FY21 15.14x/14.41x/13.59x PE, which has an increase of +10.85% compared to the current price (HKD 12.04 as of January 17, 2020), maintaining an ¡§Accumulate¡¨ rating.

Risk

The launch of new products fails expectations; Industry policy risk.

Financials

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Recommendation on 21-1-2020
RecommendationAccumulate
Price on Recommendation Date$ 12.040
Suggested purchase priceN/A
Target Price$ 13.350
Writer Info
Leon Duan
(Research Analyst)
Tel: +852 2277 6515
Email:
leonduan@phillip.com.hk

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