China Animal Healthcare: The Privileged Animal Drug Manufacturer

Leading animal drug manufacturer. China Animal Healthcare (CAL) manufactures and distributes: (i) powdered animal drugs; (ii) injection animal drugs; and, (iii) biological animal drugs, ie vaccines in China.

1st non-SOE licensed to manufacture animal Hand-Foot-Mouth (HFM) disease vaccine. We expect CAL to grab 20% of China’s HFM vaccine market when its 60%-owned Bewei Antai commences production end 2009, which will boost Group’s earnings by c. 45% from FY10 onwards. The market size of animal HFM vaccine in China is expected to reach RMB1.8-2.0b in FY09.

China was the largest consumer of pork in 2008, consuming over half of global total or > 33kg per capita a year, according to USDA. As one of the biggest manufacturers of powdered animal drugs, CAL is well positioned to ride on the booming demand for meat products, buoyed by rising Chinese residents’ affluence.

Initiating coverage with BUY, Price Target S$0.27, based on 10x FY10 P/E, which is pegged to its closest peer and backed by 45% earnings growth expected in FY10. The counter is now trading at 5.1x FY10 P/E, which is >70% discount to peers’ average.

Risks. The Group’s earnings growth in FY10 is highly dependent on the successful launch of HFM vaccine. Hence, downside risk mainly lies in the ramp-up of the new plant.

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China Animal Healthcare proposed dividend

China Animal Healthcare Ltd, which manufactures and distributes animal drugs, posted a net profit of 34.5 million yuan (S$7.7 million) for the fourth quarter ended December 2008. This compares with Q4 2007's net loss of 11.7 million yuan, which factored in a $47.4 million goodwill write-off arising from the reverse acquisition of Colorland Animation. Ignoring the goodwill write-off item, Q4 2008's net profit is just 3.3 per cent lower than Q4 2007's 35.7 million yuan. Revenue for the three months rose 12.9 per cent to 97.3 million yuan. Net profit for 2008 full year climbed 134.6 per cent to 138.3 million yuan from 2007's 58.9 million yuan (taking into consideration goodwill write-off), on the back of a 40.2 per cent rise in revenue to 385.1 million yuan. The company has proposed a first and final tax exempt (one tier) dividend of 2.2 fen per share. This amounts to 20.8 per cent of 2008 net profit.