China Animal Healthcare

Kim Eng on 1 Mar 2012

Earnings within expectations. China Animal Healthcare (CAH) recorded 4Q11 core earnings that were largely in line with our forecasts. Excluding the gain in fair value derivative financial instruments and amortised interest expense related to its convertible bonds, adjusted net profit more than doubled to RMB52.7m, helped in part by the absence of several one-off charges for its dual-listing in Hong Kong. Maintain Buy.


Ramp-up in biological drug sales. In particular, turnover for CAH’s animal foot and mouth disease (FMD) vaccines gained further traction in 4Q11, contributing almost RMB25m (+36.8% QoQ). On a full-year basis, sales of the common vaccines through the group’s network of existing customers amounted to RMB35.2m in FY11, representing a 21.0% YoY growth over last year’s sales of RMB29.1m.


Recovery in GPM. Overall gross margin also improved sequentially by 1.6ppt to 71.3%, mainly boosted by the biological drug segment. We understand that the selling prices of the Blue-Ear vaccines distributed to new provincial veterinary stations have normalised in subsequent bidding exercises. According to management, prices of raw materials in general have continued to remain stable in FY11.


Focus on animal FMD vaccines. Management is still keen to explore other sales avenues such as exporting the animal FMD vaccines to overseas markets either through joint ventures or OEM arrangements. In our view, this will help to improve its production utilisation rate and achieve higher economies of scale. In addition, it remains on the lookout for suitable acquisition opportunities, especially with regard to production licences and permits to produce bird flu vaccine.


Sound fundamentals. We maintain our Buy recommendation and target price of $0.36, based on 11x FY12F recurring EPS. CAH has declared a final DPS of 3.0 fen (payout ratio of about 21.4%), implying a dividend yield of 2.5%.