Shandong Weigao (8199.HK)             NEUTRAL (TP: HK$24.00)

Expect strong results, but valuation still high

Shandong Weigao will report AR09 results next Monday (15th March 2010). We expect revenue to be about RMB1,915.3m, reflecting YoY growth of 26.5% and net profit of about RMB633.1m (+31.2% YoY), translating into FY09F EPS of RMB0.588 (consensus RMB0.608). Net profit margin is forecast to increase from 31.9% in FY08 to 33.1% in FY09F. Trading at HK$30.60, Shandong Weigao’s current valuation at 35.3x FY10F and 29.4x FY11F PER is high, in our view, implying a 27.1% and 24.9% premium to its peer’s average. Remain NEUTRAL.

Consumables growth 31.6% YoY. We expect strong sales of consumables in Q409F of RMB431.2m, contributing 27.6% of total FY09F revenue from consumables of RMB1,561.3m. Totally we expect consumables for FY09F, contributing 80.1% to FY09F sales of total RMB1,915.3m.

Anticipate initial problems of orthopaedics JV resolved. We expect orthopaedic’s sales to be RMB124.3m, of which RMB31.1m (25.0%) are expected in 4Q09F and contribution from the distribution JV with Medtronic to be RMB34.6m, or 29.5% of FY09F associate contribution, based on our expectation that the initial difficulties associated with establishing the JV, are now resolved.

Expect sustainable stents performance. Drug eluting stents have performed strongly in Q1-Q309, and we expect Q4 to contribute 25.0%, (~RMB28.1m) of FY09F stent’s sales of RMB112.4m. The strong performance expectation is based on to the results of clinical studies, which have supported SW’s biodegradable stent and led the company to gain market share. Going forward SW’s management expects the market to further grow at over 30% per annum.

Valuation. At HK$30.60 Shandong Weigao is trading at 35.3x FY10F and 29.4x FY11F PER, which constitutes a 27.1% premium to the peer group’s average PER of 27.8x for FY10F and 24.9% premium to 23.6x for FY11F. We think that Shandong Weigao is one of the most valuable of the Hong Kong listed healthcare stocks and the company can trade at a premium to peers, given its high value-added products and international partners with associated potential. We await results and will review our TP thereafter. In the meanwhile we maintain our NEUTRAL rating.