Yet another disappointing quarter for China Animal Healthcare

1Q12 ad justed net profit of RMB38m (+8% YoY; -31% QoQ) was below our RMB42m projection on lower GPM and higher interest expenses that were partially mitigated by higher revenue of RMB172m (our estimate: RMB162m). Hence, we revised our FY12-FY13 earnings estimates down by -5% each to RMB223m-RMB247m respectively. CAL’s share price performance had been lacklustre over the past year as its earnings disappointed for four out of the five quarters since 1Q11. Given a lack of upside catalysts, we revise down our target multiple to 3.7x FY12F EV/EBITDA (previously 4.6x), which is at -0.5STD to its historical mean of 4.6x. Nonetheless, key re-rating catalysts could come from better use of its huge cash pile of RMB800m e.g. through special dividends and/or share buy-back. Maintain BUY at lower TP of S$0.28 (previously: S$0.33).

4% powdered drug revenue growth. Powdered drug grew to RMB102m although its GPM dipped by 1ppt to
77%. High meat prices and increase in consumption continue to be supportive of animal drug industry growth in China.

157% biological drug increase. Biological drug increased to RMB61m (4Q10: RMB24m) as FMD and blue ear vaccines contributed RMB21m and RMB16m to the growth. Biological drug’s GPM, however, dipped by 9ppt y-o-y to 64% due to low utilisation for FMD production facilities. Nonetheless, this was a 1ppt improvement from 4Q11.

Maintain BUY at lower TP of S$0.28. We revise our target multiple to 3.7x FY12F EV/EBITDA (previously 4.6x), which is at -0.5STD to its historical mean of 4.6x, to derive a TP of S$0.28. (old: S$0.33) We expect 2Q12 net profit to remain unexciting at RMB56m, or flat YoY.