Sinolife United (3332 HK) Acquisition of Living Nature

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1 Sinolife United (3332 HK) Acquisition of Living Nature Rating Buy Maintain Target price HKD 5.00 Total upside Current price HKD % Acquisition of natural skin care brand to expand product lines On 31 st of May, Sinolife has acquired 100% stake in a skin care brand Living Nature, which is a New Zealand brand that manufactures and sells natural skin care products to over 18 countries in the world. New Zealand is the largest market for Living Nature which accounted for 80% of total sales in FY15. Found in 1987 and based in Kerikeri in New Zealand, Living Nature s key competitive edge is to offer skincare products that are made from local natural ingredients such as Manuka oil, Mauka Honey and Halloysite Clay etc. instead of from chemical substances. Living Nature s skincare products are certified by German BDIH as 100% natural. Living Nature offers over 60 SKU product lines. Living nature turnover was about Rmb20m in FY15, similar to other skincare brands, it enjoys high gross margin of over 60%. Due to lack to operating scale, the company was only breakeven and made little profit in FY15. The acquisition was valued at Rmb20m, which was about 1x Price to Sales ratio. Management is looking to expand Living Nature s markets, especially China which it has zero exposure, their products will be channeled through cross border E-comerce platforms and Daigou. We believe the acquisition of Living Nature enhances Sinolife s product portfolio as other popular foreign nutritional supplement brands such as Blackmore and Swisse also offer natural skincare products. Furthermore, Sinolife has shown its ability to purchase cheap company and bring its products to the China market. The acquisition of Good Health was an example, it was bought for HK$140m in May 2015 with Rmb104m revenue in FY14, Good Health s turnover grew 35% yoy to Rmb140m during a year of consolidation in FY15, and it is forecast to grow to Rmb274m by FY16 due to channel expansion in China. Living Nature catalog: ge_catalogue_march2016.pdf? June 2016 Kenneth Li kenneth.li@cinda.com.hk (852) Trading data 52-Week Range (HK$) 2.32 / Mth Avg Daily Vol (m) 1.3 No of Shares (m) 939 Market Cap (HK$m) 2,788 Major Shareholders (%) Mr. Gui (56.5%) Auditors EY Result Due FY16: Aug Company description Established in 1999 and listed in 2014, Sinolife is a leading domestic nutritional supplement manufacturer in China under the brands of Zhongsheng and Cobayer. Zhongsheng and Cobayer have 39 and 43 POS in China respectively. Sinolife made two major acquisitions of Good Health and Hejian in 2015 which will be key growth drivers for Sinolife. Zhongsheng, Cobayer and Good Health are expected to account for 54%, 13%, 34% of turnover respectively in Fosun is Sinolife s strategic investor with 10.6% stake. Price chart Growing investor interest and maintain BUY We are witnessing growing investor interest Sinolife after our initiation report in May. We believe Sinolife will get meaningful re-rating if its Good Health can deliver strong growth in China market which we forecast. We maintain BUY on Sinolife with target price HK$5.00 based on 20x FY16 PE. We suggest investors to buy receive Rmb0.14/share dividend later this month. Rmb m (Dec-end) FY13A FY14A FY15A FY16E FY17E Revenue Operating profit Net Profit EPS (Rmb) P/E (x) Div yield (%) Sources: Bloomberg, CIRL estimates Page 1 of 5

2 Exhibit 1: Living Nature concept store in Japan Exhibit 2: Point of sales in Germany Exhibit 2: Living Nature website Page 2 of 5

3 Exhibit 3: Key assumptions FY13 FY14 FY15 FY16E FY17E Revenue (Rmb m) Zhongsheng Cobayer Good Health Gross margin 89.3% 92.3% 80.6% 73.9% 71.2% - Zhongsheng 92% 93% 93% 93% 90% - Cobayer 88% 93% 80% 80% 80% - Good Health 42% 50% 53% EBIT margin 48.8% 55.3% 46.4% 42.9% 37.3% Net margin 43.7% 42.7% 34.2% 29.9% 28.0% Exhibit 4: Peers comparison Bloomberg Mkt Cap PER (x) P/B (x) code (HKD mn) FY15A FY16E FY17E FY15A FY16E FY17E NUTRITIONAL SUPPLEMENT COMPARISON BLACKMORES LTD BKL AU 14, BY-HEALTH CO L-A CH 24, NUTRITIONAL SUPPLEMENT/ INFANT FORMULA COMPARISON BIOSTIME INTERNA 1112 HK 16, YASHILI INT'L 1230 HK 8, PHARMACEUTICAL COMPARISON CSPC PHARMACEUTI 1093 HK 41, SINO BIOPHARM 1177 HK 38, TRAD CHI MED 570 HK 15, CHINA MEDICAL SY 867 HK 27, FOSUN PHARMA-H 2196 HK 51, SINOPHARM-H 1099 HK 100, Average 45, NANJING SINOLI-H 3332 HK 2, Source: Bloomberg, CIRL Page 3 of 5

4 Exhibit 5: Financial statement Income statement Cash flow Year to Dec (Rmb mn) FY13A FY14A FY15A FY16E FY17E Year to Dec (Rmb mn) FY13A FY14A FY15A FY16E FY17E Revenue Pre-tax profit Gross profit (reported) Taxes paid (22) (28) (44) (72) (87) EBITDA Depreciation Depreciation (3) (3) (5) (6) (7) Associates EBIT CFO bef. WC change Net interest income (exp.) Change in working cap 5 (27) (41) (87) (85) Associates Cashflow from operation Exceptionals/others CAPEX (3) (3) (109) (15) (15) Profit before tax Free cash flow Tax expenses (24) (32) (46) (72) (87) Dividends (56) 0 (100) 0 0 Minority interest 0 (0) (3) (15) 0 Balance sheet adj Adjusted net profit Sharse issued Dividends Others Net cash flow (18) Balance sheet Net cash (debt) start Year to Dec (Rmb mn) FY13A FY14A FY15A FY16E FY17E Net cash (debt) at year-end Cash & equiv Trade receivables Ratios Other receivables Year to Dec (Rmb mn) FY13A FY14A FY15A FY16E FY17E Inventories Growth rate (%) Other current assets Revenue Fixed assets EBITDA Intangible assets EBIT Investment, associates etc Adjusted net profit Total assets ,271 Fully diluted EPS Margins (%) Account payables Gross margin (reported) Other payables EBITDA Short-term debt EBIT Other current liabs Net margin Long-term debts Other ratios Deferred tax and others ROE (%) Other long-term liabs 0 0 (4) (4) (4) ROA (%) Total liabilities Net gearing (%) (89.6) (87.6) (80.1) (71.1) (69.6) Interest coverage (x) Share capital Receivables days Reserves Payables days Shareholders' equity ,176 Inventory days Minorities Effective tax rate (%) Total equity ,176 Net cash (debt) Source: Bloomberg, CIRL estimates Page 4 of 5

5 Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Hayman Chiu Research Director (852) hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) kenneth.li@cinda.com.hk Lewis Pang Senior Research Analyst (852) lewis.pang@cinda.com.hk Wilfred Yuen Research Analyst (852) johnny.yum@cinda.com.hk Chloe Chan Research Analyst (852) chloe.chan@cinda.com.hk Johnny Yam Research Assistant (852) johnny.yum@cinda.com.hk Analyst Certification I, Kenneth Li hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 5 of 5