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1、,2.8,Company report,Consumer&RetailFood ProductsEquity China,abcGlobal Research,Biostime International(1112 HK),Overweight(V),OW(V):Supported development as key advantage,Target priceShare price,(HKD)(HKD),24.4019.98,Three new product launches could provide more cross-,Forecast dividend yield(%)Pote
2、ntial return(%),24.9,selling opportunities,Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yield,Biostimes strong focus in the baby specialty store channelis a potential foothold for market share gain,DecHSBC EPS,20
3、11 a 2012 e0.78 1.11,2013 e1.35,Maintain OW(V)rating and TP unchanged at HKD24.40,HSBC PE,20.7,14.5,11.9,PerformanceAbsolute(%)Relative(%),1M-4.4-3.7,3M9.912.4,12M63.792.6,New products unveiled could provide cross-selling opportunities.At its annual babyspecialty forum,Biostime introduced three new
4、products which could allow for more cross-,Note:(V)=volatile(please see disclosure appendix)14 November 2012Cathy Chao*AnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2996-.hkChristopher K Leung*AnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2996-.hkErwan Rambourg*An
5、alystThe Hongkong and Shanghai BankingCorporation Limited+852 2996-.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulations,selling across its product range.These new products include:1)Stage 4 milk fo
6、rmula,2)anatural baby cereal series,and 3)a collection of baby skincare products.These products havebeen distributed to channels starting in mid-October.Shift in channel preference for infant formula.According to industry discussions at theforum,the growth of milk formula sales at baby specialty sto
7、res is expected to outpace that ofthe supermarket channel.While international market leaders(eg,Mead Johnson,Wyeth,Abbott,Dumex)tend to dominate in supermarkets,we think this industry trend would supportBiostime,given c70%of sales is expected to come from baby specialty stores.Thispreference usually
8、 stems from specialty stores being convenient and from trust in theirpersonalized service.Support for store managers as key competitive advantage.After talking withmanagement but also discussing directly with baby specialty store owners,we think theamount of support Biostime offers and its detailed
9、understanding of the local market setsit apart from the international brands.In addition to Biostimes products being moreprofitable for store owners,the company also offers benefits like store managerdiscussions,educational materials for consumers,and methods to promote sales toMama100 members.Some
10、store managers indicated double-digit growth for Biostimesproducts in their stores.Thus,we think the baby specialty store channel can provide afoothold for Biostime to gain market share in conjunction with channel expansion.,Issuer of report:,The Hongkong andShanghai Banking,Valuation:We continue to
11、 use a blended PE/DCF approach.Our estimates are unchangedand we maintain our target price of HKD24.40.We reiterate our OW(V)rating.We are,Corporation LimitedDisclaimer&DisclosuresThis report must be readwith the disclosures and,1%-4%below consensus for 2012-13e earnings,respectively.Downside risks:
12、supplyand FX risks as a result of importing all products;steeper-than-expected raw materialprice increases;and new regulatory requirements.Potential catalysts:joint ventures withsuppliers for key product groups and new product launches.,the analyst certifications inthe Disclosure appendix,and with t
13、he Disclaimer,which forms part of it,IndexIndex levelRICBloombergSource:HSBC,SSE COMPOSITE INDEX2,0791112.HK1112 HK,Enterprise value(CNYm)Free float(%)Market cap(USDm)Market cap(HKDm)Source:HSBC,7,738251,55212,034,1,1,1,1,Biostime International(1112 HK)Food Products14 November 2012Financials&valuati
14、onFinancial statements,Valuation data,abc,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Profit&loss summary(CNYm),EV/sales,3.6,2.5,1.9,1.6,RevenueEBITDADepreciation&amortisationOperating profit/EBITNet interestPBT,2,189657-1364417714,3,129897-2487338905,3,83
15、91,108-311,077371,113,4,2511,229-381,191391,230,EV/EBITDAEV/ICPE*P/NAVFCF yield(%)Dividend yield(%),12.020.74.93.83.8,8.614.54.17.82.8,6.511.93.38.83.4,5.410.82.88.63.8,HSBC PBTTaxationNet profitHSBC net profit,714-187527475,905-235670676,1,113-289824824,1,230-320910910,Note:*=Based on HSBC EPS(full
16、y diluted)Price relative,Cash flow summary(CNYm),32,32,Cash flow from operationsCapexCash flow from investmentDividendsChange in net debtFCF equity,530-39-543-180-86371,823-78-63-293-127752,924-73-73-268-583851,980-149-149-330-502832,27221712,27221712,Balance sheet summary(CNYm),7,7,Dec-10,Jun-11,De
17、c-11,Jun-12,Intangible fixed assets,Biostime International,Rel to SSE COMPOSITE INDEX,Tangible fixed assets,59,113,155,266,Current assetsCash&othersTotal assetsOperating liabilitiesGross debtNet debtShareholders fundsInvested capital,2,1501,8142,2784150-1,8141,978-18,2,6132,0232,79479882-1,9412,354-
18、94,3,3202,6063,54399182-2,5242,910-121,3,9043,1084,2381,10582-3,0263,490-43,Source:HSBCNote:price at close of 13 Nov 2012,Ratio,growth and per share analysis,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Y-o-y%change,RevenueEBITDAOperating profitPBTHSBC EPS,77.593.593.7113.423.1,43.036.635.626.842.4,2
19、2.723.423.323.021.9,10.710.910.610.510.5,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit margin,-49.8-1082.226.125.230.029.4,-56.1-1159.231.226.428.727.9,-35.8-742.931.326.028.928.1,-52.0-1077.728.423.428.928.0,EBITDA/net interest(x),Net debt/equityNet debt/EBITDA(x),-91.7-2.8,-82.4-2
20、.2,-86.7-2.3,-86.7-2.5,CF from operations/net debtPer share data(CNY),EPS reported(fully diluted)HSBC EPS(fully diluted)DPSNAV,0.860.780.623.28,1.101.110.443.91,1.351.350.554.83,1.491.490.605.80,2,Biostime International(1112 HK)Food Products14 November 2012Key takeaways from 2012forum VIP baby speci
21、alty stores are expected to continue to be the maincontributing retail channel New product launches complement Biostimes existing productportfolio and offer more cross-selling opportunities The group is also exploring value-added enhancements to itscustomers with regards to education and IT developm
22、ents,abc,Forum highlightsWe attended Biostimes 2012 Member StoreForum in Macau on 12-13 November.This forumis held annually for the highest performing VIPbaby specialty store managers in order tointroduce new products and discuss storemanagement strategies.Over 4,000 attendeeswere present,including
23、store managers,representatives from suppliers,and media.Biostime-active Mama100 member count and distribution channels,As a reminder,VIP baby specialty stores are thehighest contributing channel for Biostime at c70%of sales.As of end Sept-2012,Biostime had 9,343VIP baby specialty stores within its m
24、emberstore network.,2010,1H 2011,Q3 2011,2011,Q1 2012,1H 2012,Q3 2012,Number of active Mama 100 membersyoy growth,465,536117%,685,458113%,769,610na,825,23077%,1,044,828na,1,179,73272%,1,345,28975%,Distribution channels,VIP specialty storesRetail sales organizations(e.g.,supermarkets)PharmaciesTotal
25、member retail outlets,3,6871,7163015,704,4,3992,1263896,914,5,1292,4654618,055,6,7272,96854510,240,7,6593,07960511,343,8,3213,33660112,258,9,3433,84964013,832,yoy growth,VIP specialty storesRetail sales organizations(e.g.,supermarkets)PharmaciesTotal member retail outlets,nananana,48%35%126%47%,nana
26、nana,82%73%81%80%,nananana,89%57%54%77%,82%56%39%72%,Source:Company data3,Biostime International(1112 HK)Food Products14 November 2012Summary of new initiativesNew product launches See table belowEnhancement of existing products For probiotic supplements,the stability ofingredients has been raised a
27、t higher watertemperatures;the vanilla taste has also beenremoved so the taste is more natural For infant formula,a key ingredient called-vegetable oil(allows nutritional value of milkpowder to more closely resemble breast milk)has been added in a more concentrated formEducation projects Based on cu
28、stomer and baby specialty storefeedback,management has begun investing inand co-developing several initiatives to bettereducate parents on how to raise children.Such activities should raise the brandawareness of Biostime and assist in Mama100member acquisition.An adaption of the book“What Every Pare
29、ntNeeds to Know”for the China consumer marketis expected to be released shortly.This versionof the book is done in collaboration with theauthor,Dr.Margot Sunderland,who is theDirector of Education and Training at the Centrefor Child Mental Health in London.Biostime-New products in 2012,Biostime is w
30、orking on an early educationprogram for children with a US non-profitorganization called Zero to Three.The programis still in the early stages of development andwill probably not be launched until 2014.Thisprogram will eventually be held in hospitals orlarge format baby specialty stores.Although afe
31、e/Mama100 member points may be charged,the primary purpose is to attract new members.Technology developments Biostime and CITIC are in discussions to useits point-of-sales(POS)machines forpayment.Currently,Biostime offers POSmachines for accumulation of Mama100member points.Once the upgraded POSmach
32、ines are launched at the beginning of2013,they will consolidate the payment andpoint accumulation process into one platform.Additional advantages of using the POSmachine for credit card sales include itsmobility(wireless)and a reduction in thetransaction fee(more leverage in negotiatingsales from Bi
33、ostimes entire network versusindividual stores).A mobile phone application has been developedso Mama100 members can find the closest storeonline and order products.The app is currentlyavailable on Android and iPhone edition isexpected to be released next month,abc,Product NameStage 4 milk formula,Co
34、untry of Origin(suppliers)Europe(Isigny St.Mere),Retail PriceRMB280-480,Product Features-Targets children from 3-7 years old;supplements Biostimes,previous product ranges covering Stage 1-3-Extends the purchasing life of customers,Conventional baby cereal,USA(Kerry Group),RMB68,-For babies aged 6-36
35、 months old,-Three flavours offered,including Rice,Oat,and Multigrain-Undergoes similar process as organic baby cereal line butoffered at lower price point,BMCare skincare collection France(Elixens for raw materials,Variesproduced by OEM in China),-Collection includes bubble bath,various creams/oil/
36、lotion(soothing,caring,moisturizing,diaper rash),and wipes,-Natural product components include floral water from France;each product is comprised of less than 10 ingredientsSource:Company data4,Biostime International(1112 HK)Food Products14 November 2012Valuation and risksWe value Biostime using bot
37、h a DCF(HKD25.5per share)and a peer group PE of global babyfood/care companies(HKD23.4 per share,basedon a target PE of 15.1x 12-month forward EPS).We use the midpoint of these two methodologiesto determine our target price of HKD24.4.For our DCF,we use a WACC of 10%,incorporating a risk-free rate o
38、f 3.0%,an equityrisk premium of 7.0%,a beta of 1.0,and terminalgrowth of 1.5%.This results in a DCF valuationof HKD25.5 per share,implying a 15.8x 12-month forward PE.For the PE-based valuation,we benchmarkBiostime at its historical average discount againstglobal baby food and baby care peers.We arg
39、uethat Biostimes different business segmentsshould be valued at different PE multiples.On abusiness segment-weighted average basis,and,Under our research model,for stocks with avolatility indicator,the Neutral band is 10percentage points above and below the hurdle ratefor China stocks of 10.0%.Our t
40、arget priceimplies a potential return,including a 2.8%forecast dividend yield,of 24.9%,which is abovethe Neutral band;therefore,we reiterate ourOverweight(V)rating.Potential return equals thepercentage difference between the current shareprice and the target price,including the forecastdividend yiel
41、d when indicated.Downside risks:supply and FX risks as a resultof importing all products;steeper-than-expectedraw material price increases;and new regulatoryrequirements.Potential catalysts:Joint ventures with suppliersfor key product groups and new product launches(either extensions of existing pro
42、duct lines or newproduct categories).,abc,taking a 15%discount,we derive a 15.1x target12-month forward PE for the whole business anda valuation of HKD23.4 per share.5,Biostime International(1112 HK)Food Products,abc,14 November 2012Disclosure appendixAnalyst CertificationThe following analyst(s),ec
43、onomist(s),and/or strategist(s)who is(are)primarily responsible for this report,certifies(y)that theopinion(s)on the subject security(ies)or issuer(s)and/or any other views or forecasts expressed herein accurately reflect theirpersonal view(s)and that no part of their compensation was,is or will be
44、directly or indirectly related to the specificrecommendation(s)or views contained in this research report:Catherine Chao,Christopher Leung and Erwan RambourgImportant disclosuresStock ratings and basis for financial analysisHSBC believes that investors utilise various disciplines and investment hori
45、zons when making investment decisions,whichdepend largely on individual circumstances such as the investors existing holdings,risk tolerance and other considerations.Given these differences,HSBC has two principal aims in its equity research:1)to identify long-term investment opportunitiesbased on pa
46、rticular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;and 2)from time to time to identify short-term investment opportunities that are derived from fundamental,quantitative,technical or event-driven techniques on a 0-3 month time horizon a
47、nd which may differ from our long-term investment rating.HSBC has assigned ratings for its long-term investment opportunities as described below.This report addresses only the long-term investment opportunities of the companies referred to in the report.As and whenHSBC publishes a short-term trading
48、 idea the stocks to which these relate are identified on the website Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investorsex
49、isting holdings and other considerations.Different securities firms use a variety of ratings terms as well as different ratingsystems to describe their recommendations.Investors should carefully read the definitions of the ratings used in each researchreport.In addition,because research reports cont
50、ain more complete information concerning the analysts views,investorsshould carefully read the entire research report and should not infer its contents from the rating.In any case,ratings should notbe used or relied on in isolation as investment advice.Rating definitions for long-term investment opp
