BIOSTIMEINTERNATIONAL(1112.HK)OW(V)：SUPPORTEDDEVELOPMENTASKEYADVANTAGE1115

1、2.8company reportconsumer & retailfood productsequity chinaabcglobal researchbiostime international (1112 hk)overweight (v)ow(v): supported development as key advantagetarget priceshare price(hkd)(hkd)24.4019.98 three new product launches could provide more cross-forecast dividend yield (%)potential

2、 return (%)24.9selling opportunitiesnote: 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 gaindechsbc eps2011 a 20

3、12 e0.78 1.112013 e1.35 maintain ow(v) rating and tp unchanged at hkd24.40hsbc pe20.714.511.9performanceabsolute (%)relative (%)1m-4.4-3.73m9.912.412m63.792.6new products unveiled could provide cross-selling opportunities. at its annual babyspecialty forum, biostime introduced three new products whi

4、ch 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*analystthe

5、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 finraregulationsselling across its product range. these new products include: 1) stage 4 milk formul

6、a, 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

7、stores 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. thisprefe

8、rence usually 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 an

9、d its detailed 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 toma

10、ma100 members. some 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 bankingvalua

11、tion: we continue to 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 arecorporation limiteddisclaimer &disclosuresthis report must be readwith the disclosures and1%-4% below consensus for 2012-13e earnings, res

12、pectively. downside risks: 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

13、disclosure appendix,and with the disclaimer,which forms part of itindexindex levelricbloombergsource: hsbcsse composite index2,0791112.hk1112 hkenterprise value (cnym)free float (%)market cap (usdm)market cap (hkdm)source: hsbc7,738251,55212,0341111biostime international (1112 hk)food products14 nov

14、ember 2012financials & valuationfinancial statementsvaluation dataabcyear to12/2011a12/2012e12/2013e12/2014eyear to12/2011a12/2012e12/2013e12/2014eprofit & loss summary (cnym)ev/sales1.6revenueebitdadepreciation & amortisationoperating profit/ebitnet interestpbt2,189657129897-2

15、4873389053,8391,108-311,077371,1134,2511,229-381,191391,230ev/ebitdaev/icpe*p/navfcf yield (%)dividend yield (%)12.03.88.62.86.53.45.43.8hsbc pbttaxationnet profithsbc net profit714-187527475905-2356706761,113-2898248241,230-320910910note: * = based on hsbc ep

16、s (fully diluted)price relativecash flow summary (cnym)3232cash flow from operationscapexcash flow from investmentdividendschange in net debtfcf equity530-39-543-180-86371823-78-63-293-127752924-73-73-268-583851980-149-149-330-5028322722171227221712balance sheet summary (cnym)77dec-10jun-11dec-11jun

17、-12intangible fixed assetsbiostime internationalrel to sse composite indextangible fixed assets59113155266current assetscash & otherstotal assetsoperating liabilitiesgross debtnet debtshareholders fundsinvested capital2,1501,8142,2784150-1,8141,978-182,6132,0232,79479882-1,9412,354-943,3202,6063,543

18、99182-2,5242,910-1213,9043,1084,2381,10582-3,0263,490-43source: hsbcnote: price at close of 13 nov 2012ratio, growth and per share analysisyear to12/2011a12/2012e12/2013e12/2014ey-o-y % changerevenueebitdaoperating profitpbthsbc eps77.593.593.7113.423.143.036.635.626.842.422.723.423.323.021.910.710.

19、910.610.510.5ratios (%)revenue/ic (x)roicroeroaebitda marginoperating profit margin-49.8-1030.029.4-56.1-128.727.9-35.8-742.931.326.028.928.1-52.0-1077.728.423.428.928.0ebitda/net interest (x)net debt/equitynet debt/ebitda (x)-91.7-2.8-82.4-2.2-86.7-2.3-86.7-2.5cf from opera

20、tions/net debtper share data (cny)eps reported (fully diluted)hsbc eps (fully diluted)dpsnav0.860.780.623.243.911.351.350.554.831.491.490.605.802biostime international (1112 hk)food products14 november 2012key takeaways from 2012forum vip baby specialty stores are expected to continue to

21、 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 developmentsabcforum highlightswe attended bios

22、times 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 store managers,representatives from su

23、ppliers, and media.biostime - active mama100 member count and distribution channelsas 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 memberstore network.20101h 2011q3

24、20112011q1 20121h 2012q3 2012number of active mama 100 membersyoy growth465,536117%685,458113%769,610na825,23077%1,044,828na1,179,73272%1,345,28975%distribution channelsvip specialty storesretail sales organizations (e.g., supermarkets)pharmaciestotal member retail outlets3,6871,7163015,7044,3992,12

25、63896,9145,1292,4654618,0556,7272,96854510,2407,6593,07960511,3438,3213,33660112,2589,3433,84964013,832yoy growthvip specialty storesretail sales organizations (e.g., supermarkets)pharmaciestotal member retail outletsnananana48%35%126%47%nananana82%73%81%80%nananana89%57%54%77%82%56%39%72%source: co

26、mpany data3biostime 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 at higher watertemperatures; the vanilla taste has also beenre

27、moved 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 customer and baby specialty storefeedback, management has b

28、egun 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 parentneeds to know” for the china consumer marketis expect

29、ed 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 working on an early educationprogram for children

30、 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 afee/mama100 member points may be charged,the pr

31、imary 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 posmachines are launched at the beginning of201

32、3, 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 biostimes entire network versusindivid

33、ual 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 monthabcproduct namestage 4 milk formulacountry of origin (suppliers)europe (is

34、igny st. mere)retail pricermb280-480product features-targets children from 3-7 years old; supplements biostimesprevious product ranges covering stage 1-3-extends the purchasing life of customersconventional baby cereal usa (kerry group)rmb68-for babies aged 6-36 months old-three flavours offered, in

35、cluding rice, oat, and multigrain-undergoes similar process as organic baby cereal line butoffered at lower price pointbmcare skincare collection france (elixens for raw materials, variesproduced by oem in china)-collection includes bubble bath, various creams/oil/lotion(soothing, caring, moisturizi

36、ng, diaper rash), and wipes-natural product components include floral water from france;each product is comprised of less than 10 ingredientssource: company data4biostime international (1112 hk)food products14 november 2012valuation and riskswe value biostime using both a dcf (hkd25.5per share) and

37、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 of 3.0%, an equityrisk prem

38、ium 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 arguethat biostimes di

39、fferent business segmentsshould be valued at different pe multiples. on abusiness segment-weighted average basis, andunder 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 target priceimpl

40、ies 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 yield when

41、 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 produ

42、ct lines or newproduct categories).abctaking a 15% discount, we derive a 15.1x target12-month forward pe for the whole business anda valuation of hkd23.4 per share.5biostime international (1112 hk)food productsabc14 november 2012disclosure appendixanalyst certificationthe following analyst(s), econo

43、mist(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 w

44、ill be 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 inves

45、tment horizons 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 opportuni

46、tiesbased on particular 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 mon

47、th time horizon and 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

48、short-term trading 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

49、as the investorsexisting 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

50、 research reports contain 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

51、 long-term investment opportunitiesstock ratingshsbc assigns ratings to its stocks in this sector on the following basis:for each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,regional market established by our strategy team. th

52、e price target for a stock represents the value the analyst expects the stockto reach over our performance horizon. the performance horizon is 12 months. for a stock to be classified as overweight, thepotential return, which equals the percentage difference between the current share price and the ta

53、rget price, including theforecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months(or 10 percentage points for a stock classified as volatile*). for a stock to be classified as underweight, the stock must beexpected to underperfor

54、m its required return by at least 5 percentage points over the next 12 months (or 10 percentage pointsfor a stock classified as volatile*). stocks between these bands are classified as neutral.our ratings are re-calibrated against these bands at the time of any material change (initiation of coverag

55、e, change of volatilitystatus or change in price target). notwithstanding this, and although ratings are subject to ongoing management review,expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarilytriggering a rating change.6nov

56、-07nov-08nov-09nov-10nov-11nov-1245%17%biostime international (1112 hk)food productsabc14 november 2012*a stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12months (unless it is in an industry or sector where volatility is

57、 low) or if the analyst expects significant volatility. however,stocks which we do not consider volatile may in fact also behave in such a way. historical volatility is defined as the pastmonths average of the daily 365-day moving average volatilities. in order to avoid misleadingly frequent changes

58、 in rating,however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stocks status to change.rating distribution for long-term investment opportunitiesas of 13 november 2012, the distribution of all ratings published is as follows:overweight (buy)(27% of

59、these provided with investment banking services)neutral (hold)underweight (sell)38%(27% of these provided with investment banking services)(20% of these provided with investment banking services)share price and rating changes for long-term investment opportunitiesbiostime international (1112.hk) sha

60、re price performance hkd vs hsbcrecommendation & price target historyrating history25232119171513fromn/atarget priceprice 1price 2price 3price 4price 5price 6price 7source: hsbctooverweight (v)value16.2020.0019.6023.0023.9023.3024.40date15 april 2011date15 april 201113 july 201103 february 201223 ma