Summary: AsiaPharm (APHM) saw encouraging 67% YoY growth in 3Q07 revenue to RMB130.5m, but net profit rose a meagre 8.4% YoY to RMB21.7m primarily due to elevated costs relating to its recent acquisitions. APHM enters a bitter-sweet phase with its acquisitions, as its new drugs bumped up sales, gross profits and margins substantially but ballooning expenses took a toll on net margin. We are encouraged that sales continue to grow significantly as it rides a recovering pharma market in China. We introduce FY09 figure and revise our top and bottomline to cater for the expected drag that its new cost structure will impose on APHM. Rolling forward to FY08, we derive a fair value estimate of S$0.63 (previous: S$0.84) but at a lower multiple of 12x PER (vs 14x) as we wait to see how effectively management will restructure the group to be more cost efficient. Recent market volatility has depressed the share price and we see an apt opportunity to get into the recovering pharma sector with APHM. Maintain BUY with a potential 17% upside to our fair value. (Kelly Chia)
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