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Retail Market Monitor (Hong Kong)
13 July 2012
From the Regional Morning Notes
The United Laboratories (3933 HK/BUY/Target: HK$5.00)
Sales Volume Of Bulk Medicine Rebounds; Expect Positive Earnings In 1H12
What’s New
The United Laboratories (TUL) saw a rebound in the sales volume of major bulk medicine and is expecting positive
earnings in 1H12.
Stock Impact
1H12 sales volume rebounded.
According to management, TUL’s sales volume of 6-Aminopenicillanic acid (6-APA)
and amoxicillin rebounded by about 10% yoy in 1H12. We see the volume growth as a positive signal for TUL’s market
expansion plans. We foresee the trend continuing as an increasing number of antibiotic producers exit the market.
Prices of bulk medicines stabilise and are unlikely to drop further in 2012. Our industry checks reveal that prices
of intermediate products and bulk medicine, eg, 6-APA, 7-AminoCephalosporanic acid (7-ACA) and amoxicillin have
reached the industry cost levels seen in 4Q11. We saw a slight price increase in 1H12 from 4Q11. We believe bulk
medicine prices will remain low but are unlikely to fall much further in 2012.
Insulin revenue soars and will generate significant revenue contribution in the next 2-3 years. According to
data, there are more than 100m patients suffering from diabetes in China. The main drug, recombinant human insulin,
has a market value of about Rmb6b in China and is growing rapidly at a CAGR of over 20%. TUL has invested Rmb1b
in an attempt to tap the fast-growing recombinant human insulin market. According to management, revenue from
insulin products was about HK$9m in 1Q12, increasing substantially compared with about HK$14m for the full year in
2011. We are optimistic about the management’s target of achieving a revenue of HK$50m in 2012 and HK$100m in
2013. Assuming the tender price (currently about Rmb45/unit) will remain relatively stable, we expect insulin products
to generate significant revenue contribution of about 5% in 2015.
Maintain BUY, and target price of HK$5.00, based on our discounted cash flow model, assuming WACC of 10%
and the terminal growth rate of 2%.
The target price implies 1.2x 2012F P/B. After suffering a loss in 2H11 due to
the impact of restrictions on the use of antibiotics and sharp price declines in bulk medicine, TUL is now gradually
recovering from the industry downturn by strengthening its marketing strategy and expanding market share of its new

Technical Analysis

Hang Seng Index: Testing support at 18,483

Since the Hang Seng Index bottomed at 18,056 on 4 June, the index has been unfolding a potential slanted double top
formation with the neck-line passing through 18,850.
The index completed the slanted double top formation by closing at 19,025 under the neckline in a long dark
candlestick, off an intraday high of 19,357 today.
With the breakout from the neckline in a long dark candlestick and WLPR (a momentum indicator) heading towards the
bottom of the oversold zone, we expect more downside for the index.
Based on the double-top formation, the index is likely to test the support at 18,483 near the 0.764x retracement level
before bouncing back.
On the other hand, if the index fails to find support at 18,483, it will see increasing odds to head towards the previous
low of 18,056.
Source: HKET Net

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