United Laboratories (3933 HK, HK$2.70) – First take 08 results, stock price weakness brings accumulation opportunities

FY12/08A results as expected. As expected (see “Time to take profits”), United Laboratories (ULI)'s FY12/08A net profit of HK$430.2m (down 15.7% YoY) was is in line with our expectation but lower than the market consensus. Turnover rose 44.7% YoY to HK$3,755.9m though gross margin fell 8.4pcp to 38.1% as 6-APA and amoxicillin bulk medicine prices normalized in FY12/08A (FY12/07 prices were boosted due to tight production supply and shutdowns across the industry to accommodate environmental system upgrades). Turnover increase was broad based. On a segmental basis, finished products up 34.6% YoY, intermediate products was up 23.6% YoY and bulk medicine up 25.6% YoY. We like the fact that EBIT margins improved for both finished products (up 2.5pcp YoY to 26.8%) and bulk medicines (up 0.8pcp to 11.4%). For 2H FY12/08A, the revenue increased 29.4% YoY to HK$1784.1m with a net profit drop of 61.3% YoY to HK$130.1m. The sales of finished product still recorded 27.4% YoY growth to HK$658.5m and operating profit increased 44.5% YoY to HK$192.2m. The sales of bulk medicine increased 10.4% YoY to HK$801.6m and operating profit increased 81.8% YoY to HK$78.4m. The intermediate product recorded a operating loss of HK$6.2m comparing a operating profit of HK$207.1m. The company relieved a key market concern by paying a dividend for FY12/08A. Dividend of HK$180.0m represents a payout ratio of 41.8%, representing 5.6% yield. At end-FY12/08, ULI’s net gearing ratio is 50.3%, in line with our expectations.

Our view. As we have mentioned previously, the market had too high of an expectation for ULI’s FY12/08A net profit. We expect the counter to come under pressure today as the market readjusts its expectations. That said, ULI is tracking in line with our expectations and we think that the company remains a one of the key beneficiaries of China’s healthcare reforms. We continue to maintain our view that once the current results have been digested, we think the market will gradually recognize the leading position of ULI’s finished products in China (in terms of market share and price concessions) and hence re-rate the stock’s valuation. We think that the pressure on the stock over the next couple of trading days may present good accumulation opportunities for investors. We are currently reviewing our model and will issue updated report shortly. The counter is currently trading at 6.3x FY12/09F P/E prior to our earnings revision.