China Animal Healthcare (KimEng)

Separate the wheat from the chaff

Event:

China Animal Healthcare’s (CAH) share price has corrected by almost 39% since the group won approval last December for its Hong Kong dual‐listing status. A weaker‐than‐expected 1Q11 results might have hurt stock value but we believe it was also unfairly hit by the recent spate of accounting and governance scandals involving Chinese companies listed here and abroad. We see the current weakness in share price as a good opportunity to buy into this quality stock.

Our View:

To recap, CAH posted a marginal 8.9% YoY improvement in 1Q11 net profit to RMB39.9m. This excluded the gain in fair value of derivative instruments and interest expense related to the convertible bonds. The softer growth was attributed to higher administrative expenses, arising from the increase in amortisation charges as well as start‐up costs following the acquisition of Bigvet Biotech.

In subsequent quarters, however, we expect CAH’s topline growth momentum to pick up upon obtaining the qualification rights to distribute its animal foot‐and‐mouth disease (FMD) vaccines to 10 provinces and municipalities. We understand that the first batch of vaccines has already been delivered in April.

As a manufacturer of three out of the four compulsory vaccines in China, CAH is keen to purchase the relevant production licence for bird flu vaccine. This will allow the group to fill in the missing piece of its business strategy and become a major player in the vaccine space, where barriers to entry are characteristically high.

Action & Recommendation
Reuters reported last month that CAH is in talks with investment banks to list on the Hong Kong Exchange and delist from Singapore. Though management has declined to comment on the article, it does not change our fundamental view on the group. Maintain BUY with a target price of $0.46, based on 15x FY11F PER (>30% discount to its peer average).