Sihuan Pharmaceutical - High-growth stock at cyclical-low prices

However, we have lowered our six-month target price to S$0.88, from S$1.46, in line with the recent market sell-down, and the decline in its peer-average PER to 6.6x (using a blended PER for 2007 and 2008), from 12.4x previously. Our target price is based on a 6.6x PER on our 12-month earnings forecast to 1Q09. We see the consistent delivery of growth and products as the key elements for sustaining our call.

Beyond the current market uncertainty, we see Sihuan Pharmaceutical (Sihuan) trading at S$2.72 in three years, based on a mid-cycle PER of 11.2x for the pharmaceutical sector, and our earnings forecast of Rmb525.1m for 2011. The company’s key growth drivers over the medium term include its traditional core products Kelinao, Anjieli and Chuanqing, new products Aogan and Edaravone Injection, possible patent sales from 2009, and a series of Category I products scheduled for launch from 2010.

Sihuan recorded a 52.9% YoY increase in 3Q08 net profit to Rmb66.5m, amidst the prevailing economic uncertainty. The strong performance was driven by the increasing penetration of its products in hospitals across China. We have revised up our FY08-10 earnings forecasts by up to 7.5%, to factor in the strong performance, and the potential contribution from new products.

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