China Biologic Products:A stable name to own

Ending the year with a bang; guidance appears conservative.

    CBPO reported sales/non-GAAP EPS of USD78m/0.95 vs. consensus ofUSD78m/0.83 in 4Q16. These numbers represent organic growth of 22%/39%respectively. We attribute the strong earnings growth to lower G&A expensesand the increased stake in GZ Taibang. For 2017, management guided 13-15%/18-20% growth on sales/non-GAAP net income in RMB terms, which is atthe lower end of Street expectations. The slight growth deceleration is mainlydue to the anticipated plant transition. We highlight that CBPO has asuccessful track record in beating guidance, and we model 21%/24% non-GAAP net income growth for 2017/2018 respectively.

    Robust growth achieved for human albumin.

    Sales growth for human albumin was 30% in 4Q16 on an RMB basis,compared with 27% in 9m16. The decent growth was largely driven by volumegrowth of 28% in 4Q16 vs. 25% in 9m16, while ex-FX ASP rose by 1% YoY in4Q16, vs. 2% in 9m16. However, we believe the ex-manufacturing price forhuman albumin did not rise on a sequential basis. For IVIG and other IGproducts, the combined sales growth was 13% in 4Q16, in line with the 14%growth in 9m16. CBPO continued to allocate resources to tetanus IG for betterpricing and we expect this to continue in 2017. For IVIG, ex-FX ASP growthand volume growth was 6%/-3% in 4Q16 vs. 4%/-4% in 9m16, respectively.

    Margin erosion due to higher R&D and selling expenses.

    Gross margin in 4Q16 remained stable at 60.2%, compared with 60.4% in4Q15. Operating margin decreased to 30.0% in 4Q16 from 33.1% in 4Q15 dueto higher selling expenses from placenta polypeptide, as well as higher R&Dspending. For 2017, we expect gross margin to contract slightly due to lowerASP growth and more plasma from Xinjiang Deyuan being utilized. However,we continue to expect the launch of fibrinogen in 4Q17, which is likely to be asignificant driver for margin expansion due to plasma economics.

    Adjusting price target to USD155 from 162; risks.

    We lower our target price to USD155 from 162, as we reduce our core EPS by5% for 2017. Our target price is based on 31x 2017E EPS. We believe 31x isjustified, as the company’s global peers are trading at 26x, with 15% EPSgrowth in 2018 (vs. 24% for CBPO in RMB terms). Key risks include disruptionin plasma collection, cost inflation and delays in product launches.