Results in line with expectation

Kaibao Pharmaceutical announced 2016 results: revenue was Rmb1.497bn, up 7.3% YoY; net profit attributable toshareholders was Rmb283mn, up 0.3% YoY, or Rmb0.34 per share, in line with our expectation.

Trends to watch

It will be more difficult for Tanreqing injection to achieve growth. Revenue in 4Q16 grew 21.45% YoY toRmb304mn, improving quarter by quarter; net profit in 4Q16 fell 16.63% YoY to Rmb22.66mn, due to a 55% increasein selling expenses. We estimate Tanreqing injection revenue rose >8% in 2016, mainly driven by sales to newhospitals. But considering the new NDRL limits the use of Tanreqing to severely ill patients at second-level and abovehospitals, growth is expected to become more difficult in the future.

The potential of ordinary drugs is being tapped to achieve product diversification. Banlangen granules andShengmaiyin have been put into production. Yinhuang granules, Kechuanling granules and bear gall dripping pills will beput into production in 2017. The product mix will be gradually diversified.

Oral preparations product line is initially formed. Drugs now in phase-III clinical study include Dingguiyou softcapsule （treating irritable bowel syndrome）， Shufeng Zhitong capsule （treating migraine）， Huadan Anshen mixture（anti-insomnia）， Tanreqing oral liquid （new dosage form）， Dulanermin injection （anti-tumor）， and paclitaxel micelleinjection （anti-cancer）。 Drugs in phase-II clinical study include Youxinding capsule （anti-depression）。 The in vitroproduction technology for bear gall powder is in pre-clinical study. The company is expected to form more diversifiedproduct lines in the health sector to enhance productivity.

Earnings forecast

Considering increased difficulty of growth in TCM injections, we lower our earnings forecast by 12% fromRmb0.39 to Rmb0.34 per share for 2017, and by 16% from Rmb0.41 to Rmb0.34 per share for 2018.

Valuation and recommendation

The stock is trading at 30x 2017e P/E. The company is actively seeking M&A opportunities to make its product groupsmore competitive, but there is earnings pressure in the short term. We maintain our BUY rating, but lower our targetprice by 10.71% to Rmb12.50, implying 20.08% upside room from the current price.

Risks

Product price cuts; launch of new products slower than expected; external expansion disappointing.