AsiaPharm Group Ltd: M&As showing its worth. Upgrade to BUY

Visit to Solid Success. We visited AsiaPharm's (APHM) newest acquisition
in Nanjing and came away with good vibes about the potential growth of its
cancer and neuro related products. Solid Success' 3 main oncology drugs
(Tiandixin, Lipusu and Tiandida) racked up sales of RMB188m and net
profit of RMB55.7m in 2006. We expect Solid Success to contribute about
40% of APHM's sales for FY07.
Refining distribution models. Despite the industry shake up last year,
industry intelligence showed that foreign Pharma's drugs in China did not
receive any major drop in sales. This was mainly due to 1) brand name; 2)
strong direct marketing to clinicians; and 3) strong patent protection. As its
own 500 sales representatives already provide direct reach to 30 provinces
and 2500 hospitals, APHM decided to end its exclusive distribution (no
marketing) partnership with Zuellig, which only provides reach into 16 main
provinces and APHM will still need to have an overlap in direct marketing.
After this analysis, APHM has strategically decided to maintain its direct
sales model in major provinces while executing a hybrid model of using
some distributors for selected provinces (with low base but strong potential)
to reduce overall selling and distribution costs.
Targeted R&D. We are pleased that APHM has decided to focus its R&D
dollars to develop its drug delivery technology and IP in neuro and oncology
rather than spread itself too thinly across too many drugs. Refer to Figures
1 & 2 for APHM's pipeline.
Upgrading to BUY. Contributions by its M&As in 1Q07 results were evident
with revenue and net profit boosted by 39% and 31% YoY respectively but
we are of the view that APHM's acquisitions of CMNa, Solid Success and
WBL will take a larger part of 2007 to fully integrate. We expect fuller
integration and more visibility from its M&As as we progress into 2H07 and
2008. We tweak our FY07 and FY08 net profits up to RMB141.4m (previously
RMB138.4m) and RMB183.4m (previously RMB157.4m). Rolling forward
our valuation to 14x FY07/08 PER, our fair value is now S$0.92 (vs S$0.78).
Upgrade to BUY (26% upside)