AsiaPharm Group Ltd: Healthy outlook for drug makers

Deeper integration to yield better results. Specialty pharmaceutical
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY.