Jacobson Pharma (2633 HK) China Putipg.jrj.com.cn/acc/Res/HK_RES/STOCK/2017/2/16/1e2e8f65-0... ·...

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16 Feb 2017

Wilfred Yuen

[email protected]

(852) 2235 7131

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

1.42/1.87

3.0

1,816

3,141

Derek Sum (71%)

KPMG

FY17: Jun

Company description

Founded in 1998, Jacobson Pharmaceutical is the

largest generic drug company in Hong Kong. The

company also manufactures proprietary Chinese

medicines such as Po Chai Pills. The company is

based in Hong Kong and was listed in HKSE on Sep

2016.

Price chart

Source: Bloomberg

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Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

Strong base business + transformative acquisitions

Rating Buy Initiation

Target Price HK$2.10

Current price

HK$1.73 Upside +21%

Strong base business, recent M&As are transformative We are initiating coverage of Jacobson Pharma with a Buy rating and target price of HK$2.10. In our view, Jacobson Pharma has a solid base business in generic drugs in Hong Kong with high earning visibility. We believe the recent M&As, namely the generic drug manufacturer Medipharma in Oct 2016 and the OTC brand Ho Chai Kung in Jan 2017, are earnings accretive and will significantly improve the company’s growth profile. We estimate that the two deals would allow Jacobson Pharma to achieve an inorganic growth of 5%/22% in FY17/18E, given 11%/16% organic growth in FY17/18E which we assume that the company continues to realise operating leverage, totalling 16%/38% earnings growth in FY17/18E.

A natural consolidator, leveraging its distribution resources Jacobson Pharma has built a capillary distribution network of unique scope and depth that includes substantially all public/private hospitals and registered pharmacies in Hong Kong. Moreover, the company owns a portfolio of proprietary medicines, which carries brands including Po Chai Pills (保濟丸), Tong Tai Chung Woodlok Oil (唐太宗活絡油), Contractubex Scar Gel (秀碧除疤膏), as well as the newly acquired Doan's Ointment (兜安氏藥膏) and Ho Chai Kung Analgesic Tablets (何濟公止痛退熱片). Leveraging on its manufacturing capability and distribution prowess, Jacobson Pharma’s vertically integrated business model hosts a confluence of expertise in manufacturing, OTC brand management and integrated marketing/distribution channel management, which has essentially made the company a natural consolidator, in our view.

Generics of blockbusters Crestor and Abilify to launch in 2017 As of Sep 2016, the company had 98 new product formulae in various R&D stages, and is expected to launch 30+ of these within the next 2 years. The company expects to launch generics of blockbusters Crestor (Rosuvastatin) and Abilify (Aripiprazole) in 2017. We expect the company’s first-to-market generics will snap up the domestic public sector, driving additional growth in the generic drug business.

Valuation and Risks Jacobson Pharma is trading at 12.7x forward 3/FY18E P/E. Our target price of HK$2.10 is based on forward P/E of 15.4x and 3/FY18E EPS of HK$0.14. We peg our target multiple to peers’ average. Risks include failure to achieve projected operating leverage and synergies in recent acquisitions, delayed approvals for new products (e.g. generic Crestor), loss of tenders from Hospital Authority, and acquisition uncertainties.

HK$mn FY15A FY16A FY17E FY18E FY19E

Revenue 948 1,084 1,245 1,541 1,716

Adjusted net profit* 102 155 182 248 285

EPS (HK$) NA NA 0.09 0.14 0.16

P/E (x) NA NA 19.5 12.7 11.0

* adjusted for one-off listing expenses and disposal gain of a subsidiary Sources: Company, CIRL estimates

Jacobson Pharma (2633 HK)

China Puti

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Strong base business, recent M&As are transformative

The largest generic drug company in Hong Kong, where it outperforms global

generics giants

Jacobson Pharma is the largest generic drug company in Hong Kong, where it ranks

No. 1 in market share, with 32.7% share in terms of revenue in 2015, outperforming

global generics giants including Sandoz, Teva and Apotex. The company provides

over 70% of annual purchase of generic drugs to the Hospital Authority of Hong Kong

(HA), which is the single largest purchaser of pharmaceutical products with 44.4% of

the total market in Hong Kong in 2015. The company had over 80% tender success

rate with HA during FY14-16.

The market size of Hong Kong’s total generic drug market amounted to HK$2.9bn in

2015, representing 23.2% of total pharmaceutical market in Hong Kong, according to

Frost and Sullivan. Thanks to patent expirations of blockbuster drugs (150+ patents

for drugs will expire between 2015 and 2020) and continued adoption of generic

substitution policies, generic drug market in Hong Kong is expected to grow at a

5-year CAGR of 9.9% (to HK$4.7bn in 2020) vs. patented drugs’s 5.6% and OTC

drugs’ 6.0%, according to Frost & Sullivan.

Exhibit 1: Hong Kong’s generic drug landscape (2015) Exhibit 2: Hong Kong generic drug market (2011-20E)

Exhibit 1:

Source: Frost & Sullivan, CIRL Source: Frost & Sullivan

32.7%

14.6%

11.5% 10.8%

7.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jacobson Pharma

Sandoz Teva Allergan Apotex

Jacobson Pharma ranks no.1 in Hong Kong's generic drug market, outperforming global players

1.8

2.1

2.4 2.6

2.9

3.3

3.6

4.0

4.3

4.7

0.0

1.0

2.0

3.0

4.0

5.0

HK$bn

2015-20E CAGR: 9.9%

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Dominant supplier of generic drugs for public hospitals in Hong Kong

The company provides over 70% of annual purchase of generic drugs to the Hospital

Authority of Hong Kong (HA), which is a statutory body charged with the mandate to

manage all of Hong Kong’s public hospitals and specialist out-patient clinics and is the

single largest purchaser of pharmaceutical products with 44% of the total market in

Hong Kong in 2015.

The HA primarily procures drugs through an open tender system. The contractual

period of each tender is usually two years. During FY14-16, the company secured

over 100 contracts with HA, with total contract value of c.HK$700mn and tender

success rate of over 80%. HA contributed 28%-32% of the company’s total revenue

during FY14-16.

For sales to the HA, the company is the leader in five major therapeutic areas,

including cardiovascular, CNS, gastrointestinal, oral anti-diabetics and respiratory,

with 69%, 50%, 52%, 65% and 30% of the total procurement of generic drugs by HA in

each respective category in 2015, according to Frost & Sullivan.

Exhibit 3: Hospital Authority (HA)’s annual drug expenditure, 2007-2016

Source: Hospital Authority of Hong Kong

More public hospitals, more adoption of generic drugs…

On the face of ageing population and overburdened healthcare system, the Hong

Kong government has enacted public policies to improve access to healthcare. In

2011, the Hong Kong Planning Department set a target to have one hospital bed

available for every 182 residents. In 2014, there was one bed per 194 residents vs.

198 in 2010. In Jan 2017, the Hong Kong government’s 2017 Policy Address pledges

HK$200bn developments for public hospitals, which includes plans for 5,000 new

hospital beds (or 18% increase vs. current capacity of 27,895 beds by all HA managed

hospitals) in the next 10 years. Moreover, sessions of day care clinic will be increased

by 2.8mn or 40% in 10 years.

More hospitals and clinics will be managed under HA, which will further drive the drug

2,340 2,596

2,812

3,209

3,639 4,069

4,479

4,941

5,328

5,710

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

3/2007 3/2008 3/2009 3/2010 3/2011 3/2012 3/2013 3/2014 3/2015 3/2016

HK$mn

Total HA drug expenditure (HK$mn) % YoY

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expenditures, and we believe this will in turn favour more adoption of generic drugs as

a solution to sustain the health system.

Exhibit 4: Major projects for healthcare provisions in Hong Kong

Source: Department of Health, CIRL

Hong Kong public hospitals has “room for establishing more bulk contracts”

According to a report from Hong Kong government’s Audit Commission (Report

No.67), of the 2,491 drug items purchased by the HA in 2015-16, 1,472 (or 59% of

total number of drugs purchased) were purchased using bulk contracts and 1,019 (or

41% of total number of drugs purchased) were purchased directly by hospitals. The

report revealed an audit analysis of the 1,019 drug items and concluded that there is

“room for procuring 193 drug items (involving HK$328mn in aggregate) through bulk

supply contracts by tender” (normally with a three-year term and for drug items with an

average annual purchase amount > HK$0.5mn) to “achieve better value for money”.

We believe more tenders and bulk purchases from HA will drive consolidation, which

favours well-established (in terms of production capacity and quality control) and

market leading pharmaceutical suppliers such as Jacobson Pharma.

Leadership in diverse range of generics in large, fast-growing therapeutic areas

The company have built a comprehensive product portfolio in major therapeutic areas,

including respiratory, cardiovascular, CNS, gastrointestinal, scar treatment and oral

anti-diabetes. The company owns c.3,000 product licenses in Hong Kong, which

represents 68% of all product licenses granted to Hong Kong’s drug manufacturers as

of Dec 2015, according to Frost & Sullivan.

Exhibit 5: Jacobson Pharma has solid presence in multiple therapeutic areas

* in terms of total procurement of generic drugs by Hospital Authority in each respective category

Source: Company, Frost & Sullivan, CIRL

Public hospitals:no. of

hospital bedsPrivate hospitals:

no. of

hospital beds

Tin Shui Wai Hospital 300 HKU's Gleneagles Hospital 500

Hong Kong Children Hospital 468 CUHK Hospital 300

United Christian Hospital 300

Kw ong Wah Hospital 350

Hong Kong Buddhist Hospital 130

Kai Tak Hospital 2,400

Total new additions 3,948 Total new additions 800

Target set in 2017 Policy Address 5,000

No. of hospitals (end 2015) 42 No. of hospitals (end 2015) 11

Current capacity (end 2015) 27,895 Current capacity (end 2015) 4,014

Therapeutic

categories

Market size in

Hong Kong

market

(2015)

Expected CAGR

in Hong Kong

market (2015-

2020)

Company's Market

share in

Hong Kong market

(2015)

Company's

ranking

in Hospital

Authority

Company's

market share in

Hospital

Authority* (2015)

No. of new product

formulae developed

by the company over

FY14-16

Respiratory HK$441.2mn 8.4% 78.4% 1st 29.9% 15

Cardiovascular HK$590.9mn 12.2% 17.9% 1st 68.8% 9

CNS HK$488.0mn 11.4% 12.9% 1st 50.1% 14

Scar treatment HK$87.7mn 10.6% 36.0% NA NA NA

Gastrointestinal HK$361.6mn 9.2% 16.8% 1st 52.1% 10

Oral anti-diabetics HK$196.4mn 12.0% 12.2% 1st 65.0% 1

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Exhibit 6: Market share of Jacobson Pharma in major therapeutic areas by revenue (2015)

Source: Company, CIRL

Exhibit 7: Jacobson Pharma’s top 10 products in its generic drug business (as of Mar 2016)

Source: Company

33%

78%

36%

18% 17%13% 12%

70%+

30%

69%

52% 50%

65%

0%

20%

40%

60%

80%

100%

Overall Respiratory Scar treatment Cardiovascular Gastrointestinal CNS Oral anti-diabetics

Overall generic drug market in Hong Kong Hospital Authority (HA)

FY14 FY15 FY16 FY14 FY15 FY16

28.8 28.8 28.8

45.6 47.0 51.0

38.0 38.0 39.0

49.0 50.0 52.0

76.4 75.3 78.2

135.0 135.0 135.3

44.0 45.0 46.0

45.0 46.0 50.0

250.0 263.0 295.0

263.0 295.0 329.0

125.0 69.5 50.0

750.0 880.0 880.0

45.0 46.0 46.0

46.0 46.5 48.0

53.6 81.5 70.0

760.0 800.0 880.0

3.9 4.5 3.9

21.0 24.0 26.0

44.0 45.0 46.0

45.0 46.0 48.0

ProductTherapeutic

category

Fendil Syrup Respiratory 293.5 319.2 333.7

Avastinee Tablets Cardiovascular 0.4 174.7 204.2

Bisacodyl Suppository

Glupozide Tablets Oral anti-diabetes 219.6 228.5 164.1

Fendyl Syrup Respiratory 178.0 178.0 208.3

Lostear Eye Drops Sterile eye drop 2160.0 2204.0 2419.4

Gastrointestinal 36.6 40.2 43.4

Suphenin Syrup Respiratory 188.9 222.6 284.4

Contractubex Scar treatment 123.8 170.8 168.2

Marsedyl Elixir

P.E.C. Syrup Respiratory 431.2 509.5

Respiratory

643.4

Sales volume

('000 sales packs)

Price range

(HK$ per sales pack)

660.4 738.0 1081.8

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A natural consolidator, leveraging its distribution resources

Largest distribution network in Hong Kong, with in-house logistic resources

As the largest generic drug manufacturer in Hong Kong, Jacobson Pharma has built a

capillary distribution network of unique scope and depth that includes substantially all

public/private hospitals and registered pharmacies in Hong Kong. As of Dec 2015, the

company had the largest distribution network in Hong Kong, according to Frost and

Sullivan.

The company’s subsidiaries, namely Jacobson Medical and Pharmason, are

specialised in marketing and distribution of pharmaceutical products. They are

equipped with inventory management system under the roof of a temperature and

humidity-controlled logistic facility with gross floor of c.50,000 sq ft. and cold room

facilities.

Exhibit 8: Jacobson Pharma has the largest pharmaceutical distribution network in Hong Kong

Source: Company

The company relies mainly on direct sales, which contributed c.70% of total revenue

in FY14-16. Other distribution channels include consignees and overseas third-party

distributors.

Exhibit 9: Sales breakdown by distribution channels, FY14-16


Coverage in Hong KongNo. of customers covered

(as of Apr 2016)% of coverage

Private Hospitals 11 100%

Hospital Authority Hospitals and Institutions 37 >90%

Hospital Authority Specialist Out-patient Clinics 45 >95%

Hospital Authority General Out-patient Clinics 66 >90%

Department of Health Clinics and Health Centers 141 >90%

Registered pharmacies 597 >95%

FY14 FY15 FY16

Generic drugs 824 839 945

Consignees and distributors 221 324 321

Direct sales 602 515 624

Proprietary Chinese medicines 102 109 139

Distributors 43 30 48

Direct sales 60 78 91

Revenue (HK$mn) 926 948 1,084

Generic drugs 89% 89% 87%

Consignees and distributors 24% 34% 30%

Direct sales 65% 54% 58%

Proprietary Chinese medicines 11% 11% 13%

Distributors 5% 3% 4%

Direct sales 6% 8% 8%

Revenue mix (%) 100% 100% 100%

Direct sales as of total sales (%) 71% 63% 66%

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Additional manufacturing capacity earmarked for new opportunities

Jacobson Pharma has ten PIC/S-accredited facilities for generic drugs in Hong Kong

(out of a total of 23 manufacturers approved by the Department of Health), one

GMP-accredited facility for generic drugs in China and two GMP-accredited facilities

for proprietary Chinese medicines in Hong Kong. The company has the largest

number of licensed production facilities for Western medicines in Hong Kong.

After four years of design and construction, the construction of a new manufacturing

facility for generic drugs was completed in Aug 2016 and had been granted the

regulatory license to operate in Sep 2016. The PIC/S accredited new manufacturing

plant will enhance the company’s production capacity for solid and liquid dosage

forms by 3,456 million capsules and 2.2 million litres, respectively. The additional

manufacturing capacity is ear-marked to take on new opportunities in local and

overseas markets.

Exhibit 10: Designed production capacity for solid dosage Exhibit 11: Designed production capacity for liquid dosage

Exhibit 2:

Source: Company Source: Company

Exhibit 12: Utilisation rates of production facilities for generic drugs and proprietary Chinese medicines

Exhibit 3:

Source: Company

2,446 2,446 2,292

5,748

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY14 FY15 FY16 FY17E

millions of capsules/ tablets

3,311 3,311 3,539

5,739

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY14 FY15 FY16 FY17E

000' litres

Category Unit

2014 2015 2016 2014 2015 2016 2014 2015 2016

Production facilities for generic drugs:

Solid million capsules/tablets 2,446 2,446 2,292 1,898 1,913 2,166 78% 78% 95%

Semi-solid thousand kg 353 308 353 159 170 163 45% 55% 46%

Liquid thousand litre 3,311 3,311 3,539 2,130 2,114 2,165 64% 64% 61%

Production facilities for proprietary Chinese medicines:

Chinese medicines thousand kg 222 240 495 143 139 192 64% 58% 39%

Utilisation rate (%)Designed production capacity Output

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Product development capability

The company’s in-house R&D team developed 36, 69 and 44 new products in 2013,

2014, and 2015 respectively, which occupied 49.4%, 56.6%, and 30.9% of the new

drugs registered by drug manufacturers in Hong Kong in 2013, 2014, and 2015

respectively. The company recorded R&D expenses of HK$3.5mn, HK$5.7mn, and

HK$5.6mn (excluding HK$5.5mn of capitalised development costs) for FY14, FY15,

and FY16 respectively, which were mainly used for staff costs and bioequivalence (BE)

study fee.

The company is the only generic drug manufacturer for a number of pharmaceutical

dosage forms in Hong Kong, including suppositories, enemas, sterile eye drops and

injectables. The company possesses a host of generic drug registrations with unique

formulae, with an aggregate market size of HK$47mn in 2015, according to Frost &

Sullivan. The company also develops complex products, such as orodispersible

tablets, controlled-release tablets and enteric-coated tablets. Manufacturing capability

for specialised formulations and continued efforts on product development allow the

company to command a higher profit margin and compete with MNC generic

companies.

Moreover, a new R&D centre, jointly developed with a research and academic

institution HKIB (Hong Kong Institute of Biotechnology) is expected to commence

operation in early 2017. The new R&D centre will be used to develop specialised

formulations, including fluid-bed coating (for granules and pellets), powder coating (for

tablets and granules), hot-melt extrusion (for products with low solubility) and particle

technology (for improving the crystal forms and particle science on various purposes).

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Strong OTC market presence in branded medicines

Jacobson Pharma owns a portfolio of proprietary medicines, which carries brands

including Po Chai Pills (保濟丸), Tong Tai Chung Woodlok Oil (唐太宗活絡油),

Contractubex Scar Gel (秀碧除疤膏), as well as the newly acquired Doan's Ointment

(兜安氏藥膏) and Ho Chai Kung Analgesic Tablets (何濟公止痛退熱片).

Management expects 5-8% price increase per year for its proprietary medicines in the

private sector, thanks to the branded medicines’ high brand recognition and leading

market share, as well as the company’s strong OTC presence which favours

negotiation of terms with retail outlets and third-party distributors.

Exhibit 13: Jacobson Pharma owns a portfolio of proprietary medicine brands

*Jacobson Pharma has represented 3M for Littmann Stethoscope since 1999 and Merz (Germany) for Contractubex

since 2006 in Hong Kong.


Proprietary medicines DescriptionAcquisiton

Year

Littmann StethoscopeStethoscope is an acoustic medical device for auscultation, or

listening to the internal sounds of an animal or human body.1999*

Contractubex Scar Gel

(秀碧除疤膏)

Contractubex is one of the best-selling scar treatment products in

Hong Kong, w ith a 36.0% market share in the Hong Kong scar

treatment market in terms of revenue in 2015, according to Frost &

Sullivan.

2006*

Doan's Ointment

(兜安氏藥膏)

Doan's Ointment is used for relieving the tormenting discomfort

and itching caused by piles and eczema. One of the ingredients,

phenol, is a bactericide w hich, in concentrated solution, is

destructive to tissues.

2016

Methyl Salicylate

Compound Ointment

(複方冬青軟膏)

Methyl Salicylate Compound Ointment provides effective relief for

many different pains and itching. It contains methyl salicylate.2016

Ho Chai Kung Analgesic Tablets

(何濟公止痛退熱片)

Western medicine (ingredients include paracematol) to relieve

headache, toothache, fever and influenza2017

Saplingtan Pain Reliever

(十靈丹)

A pain reliever used for the temporary relief of minor aches and

pains associated w ith headache, toothache and the common cold.

Active ingredient is acetaminophen.

2017

Proprietary Chinese medicine:

Flying Eagle Woodlok Oil

(飛鷹活絡油)

An anti-rheumatic proprietary Chinese medicated oil composed of

natural Chinese herbs and essential oils indicated for the relief of

muscle aches, pains, bruises and sw ellings associated w ith

fatigue or physical exercise

2003

Po Chai Pills (保濟丸),

aka Puji Pills (普濟丸) in China

A proprietary Chinese medicine made w ith natural Chinese herbs

for the relief of indigestion, vomiting, diarrhea and bloating, w hich

is also indicated for relieving hangovers from alcohol

2010

Tong Tai Chung Woodlok Oil

(唐太宗活絡油)

An anti-rheumatic proprietary Chinese medicated oil composed of

a balanced combination of methyl salicylate and menthol indicated

for the relief of muscle aches, pains, bruises and sw ellings

associated w ith fatigue or physical exercise

2014

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Exhibit 14: Proprietary medicine brands and products

Source: Company

Exhibit 15: Jacobson Pharma represents the following leading brands and products in Hong Kong

Source: Company

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Newly secured OTC license for Po Chai Pills offers new revenue sources in PRC

The company acquired its proprietary Chinese medicine Po Chai Pills, via the

acquisition of 55.2% stake in LCST (Li Chung Shing Tong Holdings Limited). Since

2010, the company has gained management control over LCST (and therefore Po

Chai Pills) and introduced a new management to improve the sales channel in

domestic and overseas market. Sales of Po Chai Pills grew from HK$36.1mn in FY11

to HK$102.0mn in FY16, representing a CAGR of 23.1%.

In May 2016, the CFDA reclassified Puji Pills into the OTC category. According to

management, Po Chai Pills’ sales in PRC was only HK$10mn in FY16 vs. HK$50mn

in Hong Kong or HK$40mn in overseas markets. To leverage the OTC license, the

company has recently engaged two distribution partners, namely Yunnan Baiyao

(000538 CH) and Zhuhai Jinming Medicine, to sell and distribute Puji Pills in Yunnan

and Guangdong respectively.

According to Frost & Sullivan, the Hong Kong gastrointestinal proprietary Chinese

medicine segment amounted to HK$170.8mn in 2015 and is expected to grow to

HK$264.3mn in 2020, representing a CAGR of 9.1%. Li Chung Shing’s Po Chai Pills is

the most popular brand in this segment, with 42.4% share in 2015 (2014: 41.9%).

Exhibit 16: Sales of Po Chai Pills, FY11-16


Exhibit 17: Aggregate sales of proprietary Chinese medicine (FY14-16)


36.1

102.0

0

20

40

60

80

100

120

FY11 FY16

HK$mn

FY11-16 CAGR: 23.1%

Proprietary Chinese medicine: FY14 FY15 FY16

Total sales (HK$mn) 102 109 139

% YoY 6.0% 28.1%

Sales volume ('000 sales packs)

Po Chai Pills 5,908 5,795 6,428

% YoY -1.9% 10.9%

Flying Eagle Woodlok Oil 2,186 535 2,246

% YoY -75.5% 320.0%

Tong Tai Chung Woodlok Oil - 79 88

% YoY NA 10.9%

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Track records in M&As

Since its debt entry into the generic drug industry by acquiring Vickmans in 2001,

Jacobson Pharma has been a prolific acquirer, spending over HK$1.4bn on more than

14 acquisitions. Through acquisitions, the company obtained 1,950 product licenses

vs. 1,000 product licenses through in-house development.

Exhibit 18: Jacobson Pharma’s M&A-driven growth

* disposed in 2011


Post-acquisition strategies for Ho Chai Kung brand

In Jan 2017, Jacobson Pharma completed its acquisition of 100% equity stake in Ho

Chai Kung brand (何濟公) at 14.7x 3/FY16 P/E or 12.4x P/E if subtracting the property

value of HK$90mn from the consideration of HK$568mn. The consideration was

funded equally by IPO proceeds and bank loans.

Founded in 1935, Ho Chai Kung is an OTC brand in Hong Kong, where it enjoys a

strong market position in the analgesics (pain-killer) category, whose key products are

Ho Chai Kung Tji Thung San (何濟公止痛退熱散) and Ho Chai Kung Analgesic

Tablets (何濟公止痛退熱片). The brand reported a net profit of HK$38.7mn on sales of

HK$85.2mn in FY15, with a net profit margin of 45.4% (FY15: 46.7%).

Management expects to grow Ho Chai Kung brand by i) boosting direct sales from

in-house sales team vs. distributors, ii) entering SEA market given its brand

awareness and PIC/S standards, and iii) leveraging its already strong OTC market

presence in proprietary medicines portfolio, which carries brands including Po Chai

Pills (保濟丸), Tong Tai Chung Woodlok Oil (唐太宗活絡油), Contractubex Scar Gel

(秀碧除疤膏) and Doan's Ointment (兜安氏藥膏), to improve Ho Chai Kung’s sales

channel management in terms of pricing and terms. Note that management expects

5-8% price increase per year for its proprietary medicines in the private sector.

Year TargetDeal

Structure

Deal Value

(HK$mn)Transaction rationale / target specialty

2001 Vickmans 100% 29.7 Made an entry into generic drug market

2001 Frankin 100% 11.8 Expansion of generic drugs

2003 Europharm 89% 74.3 Expansion of manufacturing capabilities and product portfolio

2005 APT 100% 44.0 Specialised formulations and products for chronic diseases

2006 Synco 100% 40.0 Strengthening market position in the Hong Kong generic drug market

2007 Jean-Marie 100% 59.0 Strengthening market share in the private sector

2007 Gobitech* 67% 24.0 Manufacturing of healthcare product

2008 PCHT 100% 125.0 Expansion of product portfolio on proprietary Chinese medicines

2009 Great Era 100% 160.0 Expansion of manufacturing capabilities and product portfolio

2011 Universal 100% 83.8 Generic drugs, particularly for respiratory products

2012 Marching 100% 67.9 Expansion of manufacturing capabilities and product portfolio (respiratory products)

2014Tong Tai Chung

(唐太宗集團)100% 38.6 Expansion of product portfolio on proprietary Chinese medicines

2016 Medipharma 100% 100.0 Strengthening market position in the Hong Kong generic drug market

2017Ho Chai Kung

(何濟公)100% 568.0 Branded medicines in the analgesics category

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Exhibit 19: Jacobson Pharma acquired Ho Chai Kung brand at 12.4x P/E


Synergies of acquiring generic drug manufacturer Medipharma

In Oct 2016, Jacobson Pharma acquired 100% equity stake in Medipharma at a

consideration of HK$100mn or 10.0x FY15 P/E. Medipharma is the 2nd largest

provider of generic drugs to the Hospital Authority of Hong Kong (HA), after Jacobson

Pharma which accounted for 70% of HA’s annual purchase of generic drugs.

Management expects synergies comes from overlapping drugs manufactured by

Jacobson Pharma and Medipharma only, thereby implying a higher market share in

the public sector. In addition, after the acquisition, Jacobson Pharma now has 10

licensed pharmaceutical manufacturers in Hong Kong, out of a total of 23

manufacturers approved by the Department of Health. Moreover, Medipharma owns

some popular and well-known brands such as Doan’s Ointment (兜安氏藥膏) and

Methyl Salicylate Compound Ointment (複方冬青軟膏).

Exhibit 20: Jacobson Pharma acquired Medipharma at 10x P/E


Completion Date Jan 2017

Acquisition price (HK$mn) 568.0

Acquisition P/E (x) 14.7

Property value (HK$mn) 90.0

Acquisition price excluding property value (HK$mn) 478.0


Ho Chai Kung (HK$mn) (Year end: Mar) 2015 2016

Revenue 76.9 85.2

% YoY 10.8%

Net profit before taxation and extraordinary items 43.0 46.3

% YoY 7.7%

Net profit after taxation and extraordinary items 35.9 38.7

% YoY 7.8%

Net profit margin (%) 46.7% 45.4%

Net assets 72.2

Completion Date Oct 2016

Acquisition price (HK$mn) 100.0


Medipharma (HK$mn) (Year end: Dec) 2014 2015 8M16

Net profit before taxation and extraordinary items 5.6 12.1 11.3

% YoY 115.6% -6.7%

Net profit after taxation and extraordinary items 4.7 10.0 9.5

% YoY 111.4% -5.6%

Net assets 17.9

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Generics of Crestor and Abilify to launch in 2017

Generics of Crestor and Abilify to launch in 2017

As of Sep 2016, the company had 98 new product formulae in various R&D stages,

and is expected to launch 30+ of these within the next 2 years. The company expects

to launch generics of blockbusters Crestor (Rosuvastatin) and Abilify (Aripiprazole) in

2017. We expect the company’s first-to-market generics will snap up the domestic

public sector, which drives additional growth in the generic drug business.

According to management, annual sales of the cholesterol-lowering statin drug

Crestor and psychiatric drug Abilify amounts to c.HK$200mn in Hong Kong, more or

less equally split in the private and public sector.

Generic drug market is the fastest growing segment in Hong Kong’s

pharmaceutical market

Thanks to patent expirations of blockbuster drugs (150+ patents for drugs will expire

between 2015-2020) and adoption of generic substitution policies, generic drug

market in Hong Kong is expected to grow at a 5-year CAGR of 10% (to HK$4.7bn in

2020) vs. patented drugs’s 5.6% and OTC drugs’ 6.0%, according to Frost & Sullivan.

Major therapeutic areas in the Hong Kong generic drug market are cardiovascular,

CNS, respiratory, gastrointestinal, anti-infective, oral anti-diabetics and oncology, with

market share of 20%, 17%, 15%, 12%, 11%, 7%, and 6% in 2015, respectively.

Exhibit 21: Generic drug market is expected to grow to HK$4.7bn in 2020, at a CAGR of 9.9%

Source: Frost & Sullivan

5.3 5.8 6.2 6.6 7.0 7.4 7.9 8.3 8.8 9.2

1.8 2.1

2.4 2.6 2.9

3.3 3.6

4.0 4.3

4.7

1.1 1.2

1.3 1.4

1.4 1.5

1.5 1.6

1.7 1.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

OTC Generics Patented

HK$bnAt consumer price levelHK$bnAt consumer price level

CAGR 11-15 15-20ETotal 8.4% 6.8%

OTC 7.1% 6.0%

Generic 12.7% 9.9%

Patented 7.2% 5.6%

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Exhibit 22: Market share of generic drug market in Hong Kong, by therapeutic area (2015)

Source: Forst & Sullivan

Generic substitution policies in sustaining healthcare systems

Rising healthcare costs continue to be a major concern for many policymakers and

generic substitution policies are adopted by a growing number of countries to

rationalise drug expenditures. According to Generic Pharmaceutical Association

(GPhA), generic drugs play an essential part in sustaining the health system in US,

where generics were responsible for 88% of prescriptions and contributed a total of

US$254bn in health system savings in 2014. In European Union (EU), all off-patent

medicines (off-patent brands and generics, combined) accounted for 92% of all

prescription volume in 2014, up from 83% in 2005. In Japan, its government

announced plans to slash healthcare costs in Jun 2015, aiming to increase the use of

generic drugs and increase its market share from 47% in 2015 to 60% by Mar 2017

(and 80% by Mar 2021).

According to healthcare consultancy IMS, generic adoption rates are increasing

across developed markets and will account for 31% of drug spending in developed

market by 2021 vs. 28.8% in 2016 and 27.8% in 2011. We believe generic drugs will

continue to play an essential role in healthcare systems, which offers generic drug

suppliers an opportunity to capture additional market share.

Cardiovascular20%

CNS16%

Respiratory15%

Gastrointestinal12%

Anti-infective11%

Oral anti-diabetics7%

Oncology (Excluding

adjunctive therapies)

6%

Others13%

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“Patent cliff” of blockbuster drugs provides opportunities for generics

companies

In 2012, an estimated US$32.8 billion of sales was reported to have been lost as a

result of the “patent cliff”. According to IMS data, the pace of expirations has picked up

again since 2015, with multiple “mini-peaks” ahead, which provides significant

opportunities for generic drug manufacturers. Between 2015 and 2020, 150+ patents

for drugs are expected to expire in Hong Kong, including monoclonal antibodies (mAb),

and some blockbuster chemical drugs, such as Olmesartan, Rosuvastatin and

Aripiprazole.

Exhibit 23: “Patent cliff” in 2012, an estimated US$32.8bn of sales was lost

Source: IMS Health (December 2014), CIRL

Hong Kong’s healthcare system and pharmaceutical market overview

The Hong Kong pharmaceutical market consists of three main sectors, namely i) the

private sector, ii) the Hospital Authority (HA), and iii) the Department of Health. The

private sector is the largest purchaser of pharmaceutical products, whereas HA is the

single largest purchaser with 44% of the total market in 2015 according to Frost &

Sullivan.

The pharmaceutical market in Hong Kong is dominated by Western medicines, with a

market share of 90.0% by revenue in 2015, according to Frost & Sullivan. The western

medicine segment is expected to grow from HK$11.4bn in 2015 to HK$15.9bn in 2020,

representing a CAGR of 6.8%, driven by population ageing, government policies to

improve healthcare provision, and increased prevalence of chronic diseases. The

proprietary Chinese medicine segment is expected to grow from HK$1.0bn in 2015 to

HK$1.7bn in 2020, representing a CAGR of 6.3%, thanks to the increasing

acceptance of Chinese medicine, according to Frost & Sullivan.

15.4 16.6

32.8

10.3 11.0

27.7

18.9

11.1

20.7

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

US$bn

"Patent cliff" in 2012 The pace of expirations has picked up again since 2015, with multiple

"mini-peaks" ahead

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Exhibit 24: Hong Kong’s healthcare system

Source: Hospital Authority, CIRL

Exhibit 25: Breakdown of Hong Kong’s pharmaceutical market (2011-20)

Source: Frost & Sullivan

Sector Player Coverage / market share

Private sector

Private hospitals, doctors in private

practice, registered pharmacies and

drug stores

• The largest purchaser of pharmaceutical products

Public sectorHospital Authority

(HA)

• The single largest purchaser of pharmaceutical products, w ith 44.4% of the total

market in 2015.

• It manages all the public hospitals in Hong Kong, including 41 public hospitals, 73

general- and 47 specialist-out-patient clinics, as of April 2016.

Public sectorDepartment of Health

(DH)

• Provides a w ide range of promotional, preventative, curative and rehabilitative

services.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Western medicines Proprietary Chinese medicines

HK$bn at consumer price level

11-15 CAGR:Western Medicines : 8.4%

Proprietary Chinese Medicine: 7.0%

15-20E CAGR:Western Medicines : 6.8%

Proprietary Chinese Medicine: 6.3%

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Valuation

Initiate at Buy with Target Price of HK$2.10

Jacobson Pharma is trading at 12.7x forward 3/FY18E P/E. Our target price of HK$2.10

is based on forward P/E of 15.4x and 3/FY18E EPS of HK$0.14. We peg our target

multiple to peers’ average. We expect re-rating towards peers’ average, as the company

continues to deliver above-sector earnings growth, driven by strong base business in

Hong Kong which provides a high level of earnings visibility and upside from PRC

market and M&A opportunities. We project 17% and 23% 3-year CAGR for revenue and

net profit respectively. Catalysts include i) robust 3/FY17 results on continued

operating leverage, ii) Po Chai Pills sales ramp-up in PRC market owing to its

newly secured OTC license and iii) potential M&A opportunities.

Risks include i) failure to achieve projected operating leverage and synergies in

recent acquisitions, ii) delayed approvals for new products (e.g. generic Crestor),

iii) loss of tenders from Hospital Authority, and iv) acquisition uncertainties.

Exhibit 26: Peers’ comparisons

Exhibit 4:

Source: Bloomberg, CIRL

Company Ticker Price Mkt Cap

HK$ HK$mn 3/FY16 3/FY17E 3/FY18E 3/FY16 3/FY17E 3/FY18E 3/FY16 3/FY17E 3/FY18E

Jacobson Pharma 2633 HK 1.73 3,141 NA 19.5 12.7 52% 17% 37% 16% 12% 13%

HK$ HK$mn 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E

Chemical drugs:

The United Lab 3933 HK 4.87 7,923 63.3 66.7 19.3 -84% -73% 236% 2% 2% 5%

Lee's Pharm 950 HK 6.78 4,001 24.4 17.1 15.8 19% 2% 12% 19% 15% 15%

Daw nrays 2348 HK 4.84 3,879 13.4 10.8 9.1 47% 5% 19% 22% NA NA

NT Pharma 1011 HK 1.69 2,633 34.1 21.4 15.0 NA 30% 37% 16% NA NA

Average - Chemical drugs 33.8 29.0 14.8 -6% -9% 76% 15% 8% 10%

TCM:

Baiyunshan 874 HK 19.98 44,051 18.2 18.1 17.6 9% 7% 12% 16% 12% 11%

Tong Ren Tang 1666 HK 14.24 18,238 25.4 25.3 22.0 17% 18% 15% 14% 13% 14%

China TCM 570 HK 3.86 17,106 25.5 15.3 12.7 50% 51% 22% 9% 8% 9%

Beijing TRT 8138 HK 10.62 8,890 23.5 20.0 17.6 23% 25% 15% 21% 22% 21%

Shinew ay 2877 HK 8.88 7,344 10.3 12.7 13.5 -7% -22% -6% 13% 9% 9%

Consun 1681 HK 4.16 4,053 17.0 12.1 9.1 18% 21% 33% 16% 18% 22%

PuraPharm 1498 HK 3.87 871 28.8 20.2 NA -17% 64% 0% 9% 9% 8%

Average - TCM 21.3 17.7 16.1 13% 23% 13% 14% 13% 14%

Average - HK-listed pharmaceutical manufacturers 25.8 21.8 15.4 8% 12% 36% 14% 12% 13%

MNC generic companies:

Teva TEVA US 34.90 35,424 NA 6.8 7.4 -48% 12% -3% 6% 12% 11%

Mylan MYL US 40.75 21,806 18.9 8.6 7.7 -9% 16% 16% 13% 16% 17%

Perrigo PRGO US 82.13 11,775 52.5 11.8 11.6 NA -8% 2% 0% 11% 12%

Sun Pharma SUNP IN 623.05 22,335 54.2 27.7 20.8 44% 4% 53% 21% 19% 20%

Lupin LPC IN 1,432.90 9,665 37.5 29.3 22.7 31% -6% 26% 30% 22% 23%

Dr Reddy's DRRD IN 2,911.35 7,206 26.8 19.6 33.4 3% 10% -41% 22% 21% 11%

Aspen Pharmacare APN SJ 31,065.00 10,879 31.3 23.8 19.4 4% -18% 72% 17% 16% 16%

P/E (x) Earnings growth ROE (%)

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Financials

Revenue

We project Jacobson Pharma to deliver revenue growth of 15% in 3/FY17E, 24% in

3/FY18E, and 11% in 3/FY19E, which translates into a FY16-19E CAGR of 17% vs.

8% in FY14-16. We expect the accelerated revenue growth will be driven by: i) organic

growth in generic drugs segment, thanks to additional Hospital Authority’s (HA)

contracts including metformin tablets and price/volume increases of branded

medicines in the private sector, ii) consolidation of sales of Medipharma and Ho Chai

Kung, and iii) sales ramp up on Po Chai Pills in PRC with newly secured OTC license.

Exhibit 27: Revenue breakdown by locations (1H17) Exhibit 28: Revenue breakdown by products (1H17)

Source: Company Source: Company

Exhibit 29: Revenue model, FY15-19E

Source: Company, CIRL estimates

Hong Kong93%

Others* 7%

*China, Macau, Singapore and others

Generic drugs

88%

Proprietary Chinese

medicines12%

HK$mn FY15 FY16 FY17E FY18E FY19E

Non-Hospital Authority 557 641 725 797 877

Hospital Authority 282 303 343 377 415

Medipharma NA NA 23 60 65

Ho Chai Kung NA NA 15 99 107

Generic drugs 839 945 1,106 1,334 1,464

Proprietary Chinese medicines 109 139 139 204 249

Revenue (HK$mn) 948 1,084 1,245 1,538 1,712

% YoY FY15 FY16 FY17E FY18E FY19E

Hospital Authority -4% 8% 13% 10% 10%

Non-Hospital Authority 5% 15% 13% 10% 10%

Medipharm NA NA NA 162% 8%

Ho Chai Kung NA NA NA 548% 8%

Generic drugs 2% 13% 17% 21% 10%

Proprietary Chinese medicines 6% 28% 0% 47% 22%

Revenue Growth Rate (% YoY) 2% 14% 15% 24% 11%

%

Generic drugs 89% 87% 89% 87% 85%

Proprietary Chinese medicines 11% 13% 11% 13% 15%

Revenue mix (%) 100% 100% 100% 100% 100%

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Exhibit 30: Revenue breakdown, FY15-19E


Margin analysis

The company recorded a GPM of 45.9%/ 40.6%/ 45.0% in FY14/15/16. The decrease

in GPM in FY15 vs. FY14 was due to additional staff costs, consumables, and D&A

incurred for upgrading production facilities to comply with the PIC/S standards,

whereas the increase in GPM in FY16 vs. FY15 was attributed by an increase in the

utilization rate. We expect Jacobson Pharma will maintain a stable GPM, around

45-46%, in FY17-19E.

In 1H17, SG&A ratio (excluding listing expenses) was improved by 1.7ppt YoY to

25.7%. We model SG&A ratio of 26.8%/25.3%/24.8% based on i) projected operating

leverage and cost synergies and ii) consolidation of Medipharma and Ho Chai Kung.

Exhibit 31: Margin analysis (FY15-19E) Exhibit 32: SG&A ratio, excluding listing expenses (FY15-19E)

Exhibit 5:

Source: Company, CIRL estimates Source: Company, CIRL estimates

2%

14%15%

24%

11%

0%

5%

10%

15%

20%

25%

0

500

1,000

1,500

2,000

FY15 FY16 FY17E FY18E FY19E

HK$mn

Non-Hospital Authority Hospital Authority

Medipharma Ho Chai Kung

Proprietary Chinese medicines Revenue Growth Rate (% YoY)

40.6%

45.0% 45.1% 46.0% 46.0%

14.7%17.1% 17.2%

21.2% 21.7%

10.8%

13.4% 13.0%16.1% 16.6%

0%

10%

20%

30%

40%

50%


Gross profit margin Operating profit margin

Net profit margin

11.1%12.3% 11.9%

11.1% 11.0%

15.5%14.7% 14.6% 14.2% 13.8%

26.6% 27.0% 26.6%25.3% 24.8%

0%

5%

10%

15%

20%

25%

30%


Selling and distribution expensesAdministrative expensesSG&A Ratio

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Capex

During FY14-16, the company spent capex on the construction of a new production

plant for Po Chai Pills and two new production facilities for generic drugs. As a result,

capex were HK$200mn, HK$340mn, and HK$134mn in FY14, FY15, and FY16

respectively, which represented a capex/ sales ratio of 12%-36%. We expect capex in

the coming years will be used mainly for maintenance and consolidation of existing

facilities. We model capex of HK$90mn/HK$100mn/HK$110mn in FY17/18/19E,

representing capex to sales ratio of c.7%

Exhibit 33: Capital expenditure, FY14-19E


Bank Borrowings

The company had an aggregate of RMB644mn of interest-bearing bank borrowings as

of Sep 2016 vs. RMB439mn as of Mar 2015. The increase in bank borrowings was

due to additional term loans taken in Aug 2016 for dividends payable (which

amounted to HK$200mn as of Mar 2016, and 70% of which were settled through

terms loans in Aug 2016 according to company’s IPO prospectus). We expect the

company used additional bank borrowings of HK$250mn to partially fund its

acquisitions of Medipharma (HK$100mn) and Ho Chai Kung brand (HK$568mn). We

model bank borrowings at HK$789mn/HK$739mn/689mn in FY16/17/18E, with

financing costs at HK$7mn/HK$17mn/HK$14mn in FY16/17/18E.

Net profit

Excluding one-off listing expenses of HK$22.6mn and disposal gain of HK$24mn, net

profit was up 26.4% YoY to HK$77.3mn in 1H17. We forecast adjusted net profit

(excluding one-off listing expenses and disposal gains on a subsidiary) to grow from

HK$155mn in FY16 to HK$285mn in FY19E, representing a CAGR of 23%.

Exhibit 34: Adjusted net profit growth, 2014-18E


FY14 FY15 FY16 FY17E FY18E FY19E

Additions of PPE 182 330 106 70 80 90

Additions of intangible assets 18 9 28 20 20 20

Capex 200 340 134 90 100 110

Capex / Sales (%) 22% 36% 12% 7% 7% 6%

102

155

182

248

285

0

50

100

150

200

250

300


HK$mn

FY16-19E CAGR: 23%

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Company Background

Exhibit 35: Company history


Exhibit 36: Management Profile

Source: Company

Year Milestones

1998 Establishment of the company

1999 Appointed as an authorised party to market and sell a leading product from 3M, namely Littmann Stethoscope

2001 Acquired Vickmans, made a debut entry into the generic drug industry

2005 Acquired APT Pharma from Merck, expanding the company's presence in chronic diseases

2006 Secured distribution and market right for Merz's Contractubex, one of the best-selling scar treatment products in Hong Kong

2007 Acquired Jean-Marie, expanding the company's footprint in the sterile product manufacturing

2010 Acquired effective management control on the business of Po Chai Pills, a proprietary gastrointestinal Chinese medicines

2011 Acquired Universal Pharmaceutical, w hich further strengthened the company's position in generic drug market

2012 Attained the position as the largest generic drugs supplier for the Hospital Authority of Hong Kong (HA)

2013 Started the development and construction of a new production plant for generic drugs

2014 Established a new R&D laboratory w ith advanced equipment

2015 Commenced the operation of the new production plant for Po Chai Pills w ith enhanced capacity and GMP accreditation

2016 Attained PIC/S GMP qualif ication for all generic drug production facilities in Hong Kong

2016 Acquired OTC license for Puji Pills in China

2016 Signed an MOU w ith HKIB to set up a joint R&D laboratory

2016 Acquired Medipharma

2017 Acquired Ho Chai Kung brand

Name Position Experience and Responsibility

Mr. Sum Kw ong Yip, Derek

Chairman

Executive Director

Chief Executive Officer

• Mr. Sum is the founder of the company and has been managing the company's business and overall strategic planning

since its establishment.

• Mr. Sum has around 28 years of sales and corporate management experience in the pharmaceutical industry.

• Mr. Sum started his career in pharmaceutical industry w ith Sandoz Division of Edw ard Keller in 1988 and moved on to

take up a management position w ith Watsons Pharmaceutical under Hutchison Whampoa in 1988. In 1990, Watsons

Pharmaceutical w as renamed as JDH Pharmaceutical. Since then, Mr. Sum had w orked in the Inchcape Group and he w as

the chief executive of Hong Kong and China of the pharmaceutical division under Inchcape JDH Limited back in 1998 before

he embarked upon his entrepreneurial pursuit w ith the company.

• Mr. Sum graduated from Cardiff University w ith an honorary bachelor’s degree in pharmacy in 1986 and w as accredited

as a practicing member of The Royal Pharmaceutical Society of Great Britain in 1987. He w as admitted into the registrar as

a registered pharmacist under the PPBHK in 1987.

Mr. Yim Chun Leung Executive Director

• Responsible for corporate management, strategic development and investor relationship functions of the company.

• Mr. Yim joined the company in 2008. Mr.Yim has over 30 years of experience in the auditing, accounting and corporate

f inance fields.

• From 2002 to 2004, Mr. Yim served as the f inancial controller of Soundw ill (stock code: 878). From 2000 to 2002, Mr. Yim

served as the CFO of Sinolink Worldw ide (stock code: 1168). From 1998 to 1999, Mr. Yim served as an executive director

of N P H International (currently know n as Concord New Energy Group, stock code: 182). From 1994 to 1998, Mr. Yim

served as the f inance director of Tysan (stock code: 687).

• He has served and been serving in numerous companies listed on the main board of the HKSE. Mr. Yim has been serving

as an independent non-executive director of China New City Commercial Development (stock code:1321) since 2014 and

served as an executive director of LVGEM (China) Real Estate Investment (stock code: 95) from 2004 and its chief

executive off icer from 2014, respectively until he resigned in 2016.

• Mr. Yim obtained a degree of master of business administration from the University of Manchester in 2008. He has been a

non-practicing member of the Hong Kong Institute of Certif ied Public Accountants since 1991, a fellow of the Association

of Chartered Certif ied Accountants since 1995 and an associate of the Institute of Chartered Accountants in England and

Wales since 2005.

Ms. Pun Yue Wai Executive Director

• mainly in charge of the administration function of the company

• Ms. Pun has joined the company since August 1998 and is one of the longest-serving employees of the company. Since

joining the Group, Ms. Pun has held various management positions w ithin the company.

• Ms. Pun has joined the company in 1998 as a stock control assistant. She w as the assistant manager of the f inance and

administration department of Jacobson Medical from 2001 to 2006, and w as later promoted to manager in 2007. She

became the general manager of Jacobson Medical in 2008 and a vice president in administration in 2015.

of 25

Risk Factors

Revenue concentration risks

The company’s single largest customer is Hospital Authority of Hong Kong (HA),

which contributed 28%-32% of the company’s total revenue in FY14-16. The HA

primarily procures pharmaceutical products through a tender process. The company is

the largest generic drug provider to HA, accounting for over 70% of its annual

purchasing amount. As a result, the company’s revenue growth will be limited by the

growth rate of HA’s budget in generic drugs. Moreover, in recent years, the HA has

adopted policies to encourage two winning bids for a single drug for drugs with a high

volume to diversify its suppliers. Despite the company has a high tender success rate

(over 80% in FY14-16), we also see some tender contract lost in FY14-16, such as

metformin tablets. Failure in winning new contracts will adversely affected the revenue

growth of the company.

Integration risks relating to recent M&As

There are integration risks that the company may not be able to integrate acquired

subsidiaries, namely Medipharma in Oct 2016 and Ho Chai Kung brand in Jan 2017,

to achieve expected synergies and to fulfill the purposes of the acquisitions.

Pipeline risks

The long-term competitiveness hinges on the company’s pipeline and its ability to

develop new generic drugs and proprietary Chinese medicines. There are risks to

meet clinical safety, efficacy, or other standards during the R&D process , or the

failure to obtain necessary regulatory approvals, including Department of Health (DH)

in Hong Kong, Macau Health Bureau, and CFDA approval on time or at all.

Reputation risks

Defective products may expose the company to liability or damage its reputation. If

there is severe adverse side effect discovered in any products manufactured or sold

by the company, it may lead to the following consequences: recall of such products,

lower success in winning bids with the company, and exposure to lawsuits relating to

such products. As a result, it could have a material negative effect on the company’s

business, financial position and operations.

of 25

Exhibit 37: Financial Summary


Income statement Cash flow

Year to Mar (HK$mn) FY15 FY16 FY17E FY18E FY19E Year to Mar (HK$mn) FY15 FY16 FY17E FY18E FY19E

Revenue 948 1,084 1,245 1,541 1,716 PBT 136 183 207 310 358

COGS (563) (596) (683) (832) (927) D&A 53 70 85 97 105

Gross profit 385 488 561 709 790 CFO before WC change 191 259 293 416 469

Other income 6 (0) 6 8 8 Taxes (26) (23) (39) (51) (59)

SG&A (252) (302) (353) (390) (426) Change in w orking capital (3) (15) (20) (72) (33)

Operating Profit 139 186 213 327 372 Cashflow from operation 162 221 234 293 377

Net f inance cost (3) (3) (7) (17) (14) CAPEX (340) (134) (90) (100) (110)

PBT 136 183 207 310 358 Acquisition of subsidiaries (34) 0 (668) 0 0

Tax (22) (30) (39) (51) (59) Cashflow from investing (391) (134) (752) (92) (102)

Minority Interests 12 7 7 11 14 Proceeds from issue of shares 0 0 698 0 0

Net profit 102 146 161 248 285 Net proceeds from bank borrow ings 165 (30) 400 (50) (50)

Disposal gain on a subsidiary 0 0 2 0 0 Borrow ing costs paid (14) (15) (19) (29) (26)

Listing expenses 0 (9) (23) 0 0 Dividends paid (11) (2) (245) (20) (20)

Adjusted net profit 102 155 182 248 285 Cashflow from financing 161 -68 798 -99 -96

Balance Sheet Ratios

Year to Mar (HK$mn) FY15 FY16 FY17E FY18E FY19E Year to Mar (HK$mn) FY15 FY16 FY17E FY18E FY19E

Cash & cash equivalents 70 83 364 466 645 Growth rate (%)

Inventories 169 197 223 279 305 Revenue 2.3% 14.4% 14.8% 23.8% 11.4%

Trade receivables 110 108 124 154 172 Gross profit -9.4% 26.8% 15.0% 26.3% 11.4%

Other current assets 45 112 101 101 101 Operating profit -37.7% 33.6% 15.1% 53.2% 13.8%

PPE 611 815 973 971 971 Net profit -40.9% 42.9% 10.8% 53.6% 14.9%

Other intangible assets 476 478 1,060 1,080 1,100 Adjusted net profit -40.9% 51.6% 17.5% 36.5% 14.9%

Other non-current assets 224 29 27 27 27 Margins (%)

Total assets 1,705 1,822 2,872 3,078 3,321 Gross profit margin 40.6% 45.0% 45.1% 46.0% 46.0%

Operating profit margin 14.7% 17.1% 17.2% 21.2% 21.7%

Trade payables 25 26 41 50 56 Net profit margin 10.8% 13.4% 13.0% 16.1% 16.6%

ST borrow ings 531 476 839 789 739 Core net profit margin 10.8% 14.3% 14.6% 16.1% 16.6%

Other current liabilities 94 314 115 120 110 Other ratios

LT borrow ings 1 1 0 0 0 ROE (%) 11.1% 15.6% 12.1% 13.1% 13.2%

Other non-current liabilities 47 49 60 60 50 ROA (%) 7.2% 8.7% 7.2% 8.7% 9.3%

Total Liabilities 699 866 1,055 1,019 955 Net gearing (%) 45.9% 41.2% 26.2% 15.7% 4.0%

Interest coverage (x) 51.3 73.5 32.1 19.5 26.1

Share capital 0 13 18 18 18 Receivables days 42 37 34 33 35

Reserves 957 894 1,748 1,991 2,298 Payables days 18 16 18 20 21

Shareholders' equity 957 907 1,766 2,009 2,316 Inventory days 107 112 112 110 115

Minorities 49 49 50 50 50 Effective tax rate (%) 16.3% 16.6% 16.5% 16.5% 16.5%

Total equity 1,007 956 1,816 2,059 2,366

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Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]

Chloe Chan Research Analyst (852) 2235 7170 [email protected]

Johnny Yum Research Assistant (852) 2235 7617 [email protected]

Analyst Certification

I, Wilfred Yuen hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from

the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so

uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is

published solely for information purposes, it does not constitute any advertisement and should not be construed as an

offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential

loss arising from any use of the materials contained in this report. This document is for the use of intended recipients

only, the whole or a part of this report should not be reproduced to others.

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