Approximately RMB10bn additional working capital required
Maintaining FY17 guidance.
Weekly sales decline continues to narrow for the third consecutive weeks
Dynamics of DS and IDS under two invoice implementation
15-16% in 2016 due to two-invoice. On coverage expansion, the company's corestrategy is to acquire local distributors. During 9m17, Jointown acquired over 40distributors, though 80 more are needed to reach target coverage at the nationallevel. On average, each acquired distributor was valued at RMB20-30m with overRMB200-300m revenue and net profit of RMB4-5m, while Jointown typicallyacquires up to 60% of interest only. In addition, each acquired asset undergoesa 3-year transition period, where operational and financial IT systems need tointegrate with Jointown's, though financial statements are not consolidated yet.
On 6Nov, Evergrande (Hold; HK$29.2) announced it has introduced a thirdround strategic investor for capital increase to its subsidiary – Hengda RealEstate with total capital of RMB60bn (six investors including ShandongHighway & Suning at RMB20bn each). This is higher than RMB30-50bn rangeguided during interim results briefing. Upon completion, total capital increasein Hengda should amount to RMB130bn, equivalent to 36.54% of the enlargedcapital. The third round capital increase is based on a pre-capital increaseconsideration of RMB365.19bn. We believe the capital increase couldsignificantly help deleveraging further. Moreover, the company alsoguarantees investors that its net profit excluding non-recurrent gains for 2018F/19F /20F will be over RMB50/55/60bn respectively. (vs previous terms for2017F/ 2018F /2019F at RMB24.3/30.8/33.7bn). With the largest landbank of276mn sqm (among all developers as of 1H17), and strong sales momentum of>CNY500bn in 2017F (CNY56.3bn sales in October with YTD of CNY422bn),CNY650bn in 2018F, we believe the company should be able to achieve theguided earnings over the next three years (aggregate of RMB165bn). For 2017,the company should be able to beat its full-year profit guidance of RMB24.3bn,considering its strong 1H results amid margin expansion.
RMB100bn sales target in 2019; 3key drivers
The practice would add some but not much profit growth to Jointown, as mostacquired assets were already clients, though volume typically will rise once ina cooperative relationship. As of now, Hubei / Henan / Beijing / Guangdongare Jointown's largest markets, with 2017 sales of RMB10bn/8-9bn/7bn/6bnrespectively.
In addition, on 6Oct, Evergrande announced that the Company had grantedshare options to 7,994senior and mid-level management personnel (~8% oftotal number employees), which will enable them to subscribe for anaggregate of 743,570,000(~5.7% of issued capital) new shares. The exerciseprice is HK$30.2and the share options will be exercisable in the next 10yearsin 5tranches. This incentive plan should help company retain talent in thiscompetitive market and continue its strong growth momentum.
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