UOB KH on C&O Pharm

Feb 28 2006
C&O Pharmaceutical
Attractive Acquisition at 3.3x PER
C&O entered an agreement to acquire 100% equity interests of a
pharmaceutical distribution company with a consideration of RMB45m, 3.3x its
CY05 profit guarantee of Rmb13.5m.
Respectable acquisition target. Before acquisition, this distribution company
named Lian Cheng was one of the key distributors of C&O, providing import,
logistic and marketing services. Through long-term cooperation, Lian Cheng has
gained sound knowledge about C&O’s products and extensive distribution
network with major hospitals in East and Southeast China.
Gained more control over distribution network. We expect Lian Cheng will
facilitate C&O to penetrate market in these areas by its existing network and
coordinate regional sales resources. Furthermore, C&O could share the lucrative
profits from distribution business. We estimate the deal will be finalized mid-
CY06, and start contribution in FY07.
Attractive valuation of 3.3x earning. The acquisition consideration was
Rmb45m, 3.3x Lian Cheng’s CY05 net profit guarantee Rmb13.5m. In our view,
the deal was attractive given that the average PE for pharmaceutical companies
was around 10x PE multiples. C&O had a strong net cash position of HK$182m
at end-Dec05, thus the acquisition will be funded internally.
Positive prospects for FY06. C&O had reported a good set of interim results
with 31% bottom line growth. We feel positive about the growth momentum in
2H06, given a) intensified marketing activities to promote both third-party
products and self-branded products in areas that were paid little attention before
b) improving brand recognitions of newly launched proprietary products and c)
other potential acquisition deals.
Upgrade earning and new target price S$0.48. We forecast Lian Cheng’s
potential bottomline contribution at Rmb15.5m and 17.8m at FY07-08, assuming
15% growth rate. Our previous target price S$0.43 implies 10.7x FY06 PE and
10x FY07 PE. Therefore, by applying 10x FY07 PE, we upgrade our target price
to S$0.48. Reiterate BUY.