Research Reports

KGi:Consumption play immune to drug price reform

Source: Kingworld medicine

Potential catalysts
Share correction unwarranted as drug price controls have little impact on Kingworld.
Kingworld specializes in OTC drug distribution, targeting pharmacies as the main market for its products, which are mostly personal health supplements or non-prescription drugs. As the ongoing price reform is targeting prescription drugs, we reckon that risks are extremely low for Kingworld’s products to be affected. Earlier,
Kingworld’s stock price fell alongside the entire pharmaceutical sector, which could have been a misunderstanding.

Margin to rise on renminbi appreciation vs. HK$ and improved product offering.
Kingworld does 90% of its drug procurement in HK dollars. In 2012, we expect gross margin to rise on renminbi appreciation against the HK dollar. Kingworld’s push of high-margin 
products via ‘Kingworld Healthy Family’ booths will also boost gross margin.

Planned acquisitions of local distributors to contribute from 2012.
In varying regional markets, Kingworld plans to acquire local distributors with gross margin similar to Kingworld’s. The acquisitions will be priced lower than 13x Kingworld’s 2011F EPS and boost profitability. At the soonest, we expect the acquired entity to be included in the consolidated financial statement in 2012 and start contributing significantly to sales and earnings in 2013.