华兰生物(002007)

Profit rebounded in 2Q18; expect quadrivalent flu vaccines to add another leg

Hualan reported sales/core profit of RMB639m/217m in 2Q18, up 35%/33% YoYvs. 4%/-18% in 1Q18 and 22%/12% in 2017. The robust growth was mainlydriven by strong sales of PDTs. We highlight that Hualan and Changsheng bothobtained quadrivalent flu vaccine approvals from the CFDA on June 8, 2018.We expect the quadrivalent to further boost profit in 2H18, as Hualan is likelyto take a majority market share due to the recent Changsheng vaccine scandal.Management reiterated that 7-8m doses of quadrivalent flu vaccine in 2H18translate into sales of around RMB800m.

Coagulation factor products drove growth

Sales growth for PDTs was 18% YoY in 1H18, vs. 14% YoY in 2H17 and 16% in1H17. The strong growth was mainly driven by coagulation factor products, whichachieved 56% YoY growth in 1H18, according to management. Sales growth ofalbumin decelerated to 8% YoY in 1H18, vs. 42% in 2H17 and 28% in 1H17. IVIGdropped 17% YoY in 1H18, vs. -14% YoY in 2H17 and 1% YoY growth in 1H17.Management indicated that the ASP of albumin fell 7% in 1H18 and ASP of IVIGwas down by around 3%.

Margin diminished due to price cut

GM dropped 410bps to 59.0% in 2Q18, vs. 63.1% in 2Q17, mainly due to a pricecut for PDTs. OPM decreased 358bps to 39.7% in 2Q18, vs. 43.3% in 2Q17. Weattribute the OPM contraction to rising selling expense, which grew 84% YoYin 2Q18, reaching 7.3% of sales, vs. 5.3% in 2Q17, mainly due to expansion ofthe sales team. Management guides for PDTs selling expense of RMB61m in2H18, vs. RMB26m in 1H17, and expects it to reach RMB150-180m in 2018. Wehighlight that OCF increased to RMB382m in 1H18, vs. RMB-31m in 1H17, dueto an increase in cash received from sales of goods.

Increasing PT to RMB33.4 from RMB31.4; risks

We raise both 2018E and 2019E EPS by 2%. Our new price target is based on 27x2019E EPS, vs. the 26x we used previously, as we now see better EPS growth in2020E. We believe this is justified given that peers are trading at 38x with 23%growth in 2020E (vs. the 15% that we model for Hualan). Key downside risksinclude further deterioration in PDT business, regulatory risk and product quality,while upside risks include faster-than-expected adoption of quadrivalent vaccineand a recovery in PDT business.