United Laboratories (3933 HK)

Our six-month target price of HK$3.12 for United Laboratories (TUL) is based on a peer-comparison PER of 6.6x (blended for 2007 and 2008) on our earnings forecasts for FY08. Given our forecast of continued rises in earnings, we think the stock is attractive as it is trading currently at a PER of 3.6x on our FY08 EPS forecast, and offers a forward dividend yield of 11.1%. We see the stock trading to S$8.95 in three years’ time, based on the mid-cycle PER of about 12x for the pharmaceuticals sector, and our earnings forecasts for FY11.

TUL is one of the largest manufacturers of generic antibiotic products in the PRC. We believe it has the scale to provide a competitive edge in production costs, the integration to generate better profit margins and operational flexibility, and the quality to ensure ready demand and higher pricing for its products. We see these as the core attributes to drive continued market-share gains in the mature but expanding antibiotic market in the PRC.

We expect TUL to record slower but continued net-profit growth for FY08-10, backed by capacity expansion. While prices of antibiotic products have been trending down since 2H07, we expect the increase in sales volume at TUL to more than offset the decline. We also expect prices to stabilise over the next six-to-12 months, as they have already dropped to near historical levels.

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