Sihuan Pharmacuetical - Strong operating performance

We have raised our six-month target price to S$0.94, from S$0.70, to factor in an improved operating outlook for Sihuan Pharmaceutical (Sihuan), following the announcement of its 2Q FY09 results. Our target price is based on a PER of 5.5x (a 35% discount to the forward peer-median PER) on our FY10 earnings forecast (from FY09 previously).

Sihuan recorded a 2Q FY09 net profit of Rmb64.7m, up 6.6% YoY, which included a divestment gain of Rmb38.2m, and a Rmb73.3m write-down of intangible assets. As a result of the “house-cleaning” exercise, we no longer expect asset write- down to be a drag on future earnings.

Sihuan’s pretax profit, excluding the divestment gain and asset write-off, was 17.4% above our forecasts. Sales revenue rose 38.4% YoY, and contributions from its key products – Kelinao, Anjieli, Chuanqing, Quao and Ninxinao – also exceeded our expectations. We have lowered our FY09 net profit forecasts by 8.6% to factor in the asset write-down, and raised our net profit forecasts for FY10 and FY11 by 7-8% to factor in a stronger outlook.

We maintain our 2 rating for Sihuan in view of its strong operating performance for 2Q FY09. We have raised our six-month target price to S$0.94, from S$0.70, to factor in an improved operating outlook.

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