biostime international · pdf filewe sensed local protection of health food licensing in many...

Please read carefully the important disclosures at the end of this report

Equity Research

April 21, 2016

Biostime International Holdings

Swisse under policy containment

Investment Focus

Maintain HOLD

Action

After talking to key industry figures about the recent harsher regional customs policies, we sense the policy climate is about to worsen, i.e. restrictions have been put on all Health Food imports before Chinese regulators grant their approval, either through registration or filing. This impacts the China outlook of Biostine’s newly-acquired (September 2015) Australian company, Swisse Wellness, and we thus make our forecasts more conservative, although we still maintain HOLD after revising our earnings.

Reasoning

We held a conference with key industry figures and realized the latest policy moves point to a worsening scenario for Health Food imports through cross-border e-commerce channels.

We noticed the actions of some regional customs (such as Ningbo) are posing strict restrictions upon both FTA and overseas direct post modes for the import of goods out of the recently issued positive list.

Swisse may thus penetrate China market at a slower pace, while the IMF outlook is that China regulatory bodies must grant a buffer period until 2018 and will give more details on the formula registration.

Earnings forecast and valuation

We sharply reduce our 2016/17e earnings by 32.4%/59.7% (see our revisions and reasoning on pages 3~4). We thus cut its TP by 23% from HK$30.36 to HK$23.31 due to earnings revisions and changes in Health Food and IMF P/E benchmarks under the SOTP methodology.

Risks

Upside risk may come from Swisse's new product development that can bypass China's policy hurdles and possible loosening in real execution of stipulated restrictions in the future.

Ticker 01112.HK

CICC investment rating HOLD

Last close HK$23.65

CICC target HK$23.31

52wk price range HK$37.87~11.72

Market cap (bn) HK$15

Daily value (mn) HK$123.65

Shares outstanding (mn) 630

Free float (%) 100

Daily volume (mn sh) 4.55

Business sector Food & Beverages

(Rmb mn) 2014A 2015A 2016E 2017E

Revenue 4,732 4,819 5,923 5,510

(+/-) 3.7% 1.8% 22.9% -7.0%

Net profit 807 251 489 465

(+/-) -1.7% -68.8% 94.3% -4.9%

EPS 1.28 0.40 0.78 0.74

BPS 4.63 5.72 6.66 7.56

DPS 0.51 0.00 0.00 0.00

CPS 1.54 0.60 2.56 1.72

P/E 14.8 49.6 26.5 28.0

P/B 4.1 3.5 3.1 2.7

EV/EBITDA 9.6 27.7 11.6 12.1

Dividend yield 2.7% 0.0% 0.0% 0.0%

ROAA 14.3% 2.5% 3.4% 3.1%

ROAE 29.7% 7.7% 12.5% 10.4%

Source: Wind, Bloomberg, company data, CICC Research

Paul Feiyang YUAN

[email protected]

SAC Reg. No.: S0080511030012

SFC CE Ref: AIZ727

28

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01112.HK HSCEI

CICC Research: April 21, 2016


2

Financial summary Financial statement (Rmb mn) 2014A 2015A 2016E 2017E

Income statement

Revenue 4,732 4,819 5,923 5,510

COGS -1,805 -1,834 -2,264 -2,104

Selling expenses -1,588 -1,976 -1,884 -1,743

Administrative expenses -175 -280 -267 -263

Other ops income (expense) -87 -215 -226 -226

Operating profit 1,205 658 1,424 1,336

Finance costs -87 -154 -594 -554

Other income (expense) 0 0 0 0

Profit before income tax 1,118 504 830 782

Income tax -312 -211 -232 -219

Minority interest 0 -42 -109 -98

Net profit 807 251 489 465

EBITDA 1,143 626 1,473 1,406

Recurrent net income 807 301 489 465

Balance sheet

Cash and bank balances 3,347 2,875 3,679 3,495

Trade and bill receivables 12 623 487 528

Inventories 797 856 1,021 949

Other current assets 179 284 284 269

Total current assets 4,336 4,638 5,470 5,241

Fixed assets and CIP 478 547 769 965

Intangible assets and others 1,817 8,647 8,593 8,539

Total non-current assets 2,295 9,194 9,362 9,504

Total assets 6,631 13,832 14,832 14,745

Short-term borrowings 0 4,740 4,740 4,269

Trade and bill payables 295 619 764 710

Other current liabilities 973 1,320 1,578 1,482

Total current liabilities 1,268 6,679 7,083 6,461

Long-term borrowings 2,411 2,688 2,688 2,659

Total non-current liabilities 2,446 3,552 3,552 3,523

Total liabilities 3,714 10,231 10,634 9,984

Share capital 822 822 822 822

Retained profit 2,095 2,779 3,376 3,939

Equity 2,917 3,601 4,198 4,761

Total liabilities & equity 6,631 13,832 14,832 14,745

Cash flow statement

Pretax profit 1,118 504 830 782

Depreciation & amortization 51 87 131 158

Change in working capital 151 -39 375 -105

Others -348 -175 280 247

Cash flow from operations 972 377 1,616 1,082

Capital expenditure -148 -2,915 -300 -300

Others -312 -4,000 82 88

Cash flow from investing -460 -6,916 -218 -212

Equity financing 0 0 0 0

Bank borrowings 1,664 4,769 0 -500

Others -492 -379 -594 -554

Cash flow from financing 1,172 4,390 -594 -1,054

Foreign exchange gain (loss) -1 0 0 0

Net changes in cash 1,682 -2,149 803 -184

Financial ratios 2014A 2015A 2016E 2017E

Growth ability

Revenue 3.7% 1.8% 22.9% -7.0%

Operating profit 2.8% -45.4% 116.4% -6.2%

EBITDA 2.8% -45.2% 135.2% -4.6%

Net profit -1.7% -68.8% 94.3% -4.9%

Profitability

Gross margin 61.9% 61.9% 61.8% 61.8%

Operating margin 25.5% 13.7% 24.0% 24.2%

EBITDA margin 24.1% 13.0% 24.9% 25.5%

Net margin 17.1% 5.2% 8.3% 8.4%

Liquidity

Current ratio 3.42 0.69 0.77 0.81

Quick ratio 2.79 0.57 0.63 0.66

Cash ratio 2.64 0.43 0.52 0.54

Liabilities / assets 56.0% 74.0% 71.7% 67.7%

Net debt / equity net cash 116.5% 81.2% 65.1%

Return

RoA 14.3% 2.5% 3.4% 3.1%

RoE 29.7% 7.7% 12.5% 10.4%

Per-share data

EPS (Rmb) 1.28 0.40 0.78 0.74

BPS (Rmb) 4.63 5.72 6.66 7.56

DPS (Rmb) 0.53 0.00 0.00 0.00

Cash flow per share (Rmb) 1.54 0.60 2.56 1.72

Valuation

P/E 14.8 49.6 26.5 28.0

P/B 4.1 3.5 3.1 2.7

EV/EBITDA 9.6 27.7 11.6 12.1

Dividend yield 2.7% 0.0% 0.0% 0.0%

Source: Company data, CICC Research

Company description Biostime International Holdings Limited focuses on providing premium pediatric nutritional and baby care products to pregnant and

nursing mothers for their infants and children. The family of products includes premium and probiotic supplements for children,

infant formulas and dried baby food products marketed under the brand name Biostime. In 2015, Biostime acquired ~83% stake of

Australian vitamin & dietary supplements leader Swisse Wellness, entering the adult nutrition market.



3

Earnings revision & reasoning

Expect 25% SKUs to have China sales permits in both on- & off-line channels

Since policy restrictions apply to all online channels – including FTA, overseas direct post as well as the luggage and mail – Swisse's China market access may only be fully granted on approval from regulators by going through registration or filing systems in return for sales permits in both online and offline channels

Based on our checks with industry experts and management, we expect 20% of Swisse SKUs can be allowed to go through the filing system. The application procedure will take 6~12 months and products after filing will be permitted to be sold in both online and offline channels. We expect another 5% of SKUs may be registered as general food. The application procedure will also take 6~12 months and approved products can be freely traded in all channels.

We thus expect this 25% SKUs will help capture 2.3% shares in both online and offline markets by 2026. The good thing is the offline penetration may start as early as next year, while we have to cut Swisse’s online penetration from 4.3% in 2015 to 3% and 1% in 2016-2017.

We do not expect a chance of more Swisse SKUs to be successfully registered in the future due to two major concerns:

Most Swisse SKUs are made of raw materials that do not have any registered safety record in China and will incur a long period to get approved by the Chinese FDA.

We sensed local protection of Health Food licensing in many early cases in China.

Our margin assumptions could be less affected since the recently raised import taxation can be easily digested by either Swisse consumers being less price-sensitive (Swisse products are usually sold at big price premium over major competitors, but can still be top volume seller) or the channel persons charging a huge mark-up over the low ex-factory price level (we found certain SKU may have a total mark-up of more than threefold between ex-factory and retail prices).

Forecast on Swisse’s Australia/New Zealand sales and the 5% sales commission from its JV with P&G and Teva will also stay intact, making Swisse’s overall sales and earnings CAGR steadily at 6.8% and 7.1% over the next decade.

About debt refinancing and funding cost

The debt refinancing will be conducted by both 3-year syndicate loans of US$450mn~650mn settled by 2Q16 and the issuance of a 5-year bond of US$200mn~400mn scheduled in 3Q of this year. Cost of syndicated loan has be managed into a narrow range of 6~7% p.a., while the cost of bonds is now testing the market feedback with a possible range of 7~10% p.a.; we feel safe using 8% p.a. in our existing forecast.

Cut IMF sales and margin target slightly

Given IMF’s continuously sliding sales in 1Q16, we cautiously revise down our long term sales target by 10% as well as lower the EBIT margin stability level to 15% instead of 19% over the long run.



4

HOLD recommendation maintained through both SOTP & DCF methods

We believe policy containment can never end Swisse’s China market penetration, it will only slow the pace of its future growth delivery (sales CAGR of Swisse in China expected to be 11.6% over the next decade). We revise down our end-2016 TP under SOTP by 23% from HK$30.36 to HK$23.31 due to the cut to earnings and change of Health Food (down from 20x to 19.2x) and IMF (up from 13.1x to 14.3x) P/E benchmarks. We use the DCF method to double check and get a similar result of HK$23.51.

Figure 1: SOTP valuations


Figure 2: Valuations of comparable companies

Source: Bloomberg, company data, CICC Research

Figure 3: DCF model


2016ENet profit

(Rmb mn)

Valuation

method

Valuation

(HK$ mn)

Price/share

(HK$)

% of total

valuation

Swisse 531 19.2x2016 PE 11,756 18.66 80%

Biostime IMF segment etc. 386 14.3x2016 PE 6,361 10.10 43%

Net debt by end-2016 -3,429 -5.44 -23%

Biostime 917 14,688 23.31 100%

Company TickerMarket Cap (USD

mn)

2016-4-21 2015A/E 2016E 2017E 2015A/E 2016E 2017E 2015A/E 2016E 2017E 2015A/E 2016E 2017E 2015A/E 2016E 2017E

Healthy food players

GNC HOLDINGS INC-CL A GNC US Equity 2,341 12.8 10.5 9.6 5.5 5.5 4.9 42.5 52.6 51.4 2.1 2.4 2.6 8.3 7.6 7.5

HERBALIFE LTD HLF US Equity 5,385 14.1 12.6 11.5 n.m n.m n.m n.m n.m n.m - - - 9.0 8.3 7.6

BLACKMORES LTD BKL AU Equity 2,169 59.7 28.4 22.5 17.5 16.6 12.9 29.3 58.3 57.3 1.3 2.7 3.4 35.5 18.6 14.9

BY-HEALTH CO LTD-A 300146 CH Equity 3,307 33.0 26.0 21.0 4.7 4.3 3.8 14.2 16.5 17.8 2.0 2.3 2.1 28.5 21.5 17.3

USANA HEALTH SCIENCES INCUSNA US Equity 1,516 17.1 15.8 13.6 5.6 4.1 3.2 33.1 26.0 23.4 - - - 9.1 8.6 7.8

AVON PRODUCTS INC AVP US Equity 2,163 -1.9 21.8 16.0 -2.0 -2.0 -2.5 105.8 -9.4 -15.5 4.8 - - 12.8 8.3 7.4

Average 22.5 19.2 15.7 6.3 5.7 4.5 45.0 28.8 26.9 1.7 1.2 1.4 17.2 12.2 10.4

Milk formula Players

MEAD JOHNSON MJN US Equity 15,724 25.7 24.0 22.2 n.m n.m n.m n.m n.m n.m 2.0 2.1 2.4 16.5 16.1 15.3

DANONE SA BN FP Equity 48,025 30.7 21.1 19.4 3.1 2.9 2.7 10.2 14.0 14.1 2.5 2.6 2.8 14.7 13.1 12.3

NESTLE SA-REG NESN VX Equity 245,300 25.5 21.9 20.3 3.7 3.4 3.3 14.3 15.6 16.2 3.0 3.1 3.3 16.1 14.6 13.8

MEIJI HD 2269 JP Equity 12,270 41.8 22.6 23.0 3.1 3.1 2.8 7.4 13.6 12.4 0.6 0.9 1.1 16.0 13.0 12.0

MORINAGA MILK IN 2264 JP Equity 1,295 33.6 n.a 17.7 1.0 n.a n.a 3.1 n.a n.a 1.2 n.a n.a 9.7 n.a n.a

ABBOTT LABS ABT US Equity 64,602 14.9 20.3 18.1 3.0 2.9 2.7 20.4 14.2 15.2 2.2 2.4 2.6 15.6 13.1 12.0 PFIZER INC PFE US Equity 203,396 29.1 14.3 13.0 3.1 3.2 3.1 10.8 22.4 23.4 3.4 3.6 3.9 12.9 10.5 9.7

Average 28.8 20.7 19.1 2.9 3.1 2.9 11.1 15.9 16.3 2.1 2.5 2.7 14.5 13.4 12.5

Biostime 1112 HK Equity 1,922 49.9 25.7 27.0 3.5 3.0 2.6 7.0 11.6 9.8 - - - 26.6 10.7 11.0

PE Ratio PB Ratio ROE (%) Dividend Yield (%) EV/EBITDA

Rmb mn 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

EBIT 1,342 1,248 1,416 1,557 1,618 1,717 1,828 1,944 2,037 2,136 2,237

YoY 148.8% -7.0% 13.4% 10.0% 3.9% 6.1% 6.4% 6.3% 4.8% 4.8% 4.7%

OFCF 1,316 782 895 861 1,056 984 853 1,215 1,276 1,340 1,413

YoY n.m -41% 14% -4% 23% -7% -13% 42% 5% 5% 5%

Terminal grow th rate 2.0%

PV of FCF 7,791 Cost of debt 6.0%

Terminal value 8,229 Cost of equity 9.7%

Enterprise Value 16,020 Risk free rate 2.8%

- Net debt 3,750 BETA 1.1

- Minority interests 418 Risk premium 6.3%

Equity Value 11,853 Tax rate 28.0%

Equity value per share (Rmb) 18.8 Target gearing 10.0%

Equity value per share (HK$) 23.51 WACC 9.2%



5

Figure 4: Earnings forecast revisions


Figure 5: Key assumptions for Swisse


(Rmb mn) Before After Chg. Before After Chg.

Sales Revenue 6,916 5,923 -14.4% 7,541 5,510 -26.9%

Probiotic supplements 389 350 -10.0% 389 350 -10.0%

Infant formulas 3,356 3,020 -10.0% 3,356 3,020 -10.0%

Dried baby food & nutrition supplements114 102 -10.0% 114 102 -10.0%

Baby care products 110 99 -10.0% 110 99 -10.0%

Gross Profit 4,271 3,659 -14.3% 4,653 3,405 -26.8%

Probiotic supplements 259 233 -10.0% 259 233 -10.0%

Infant formulas 2,124 1,912 -10.0% 2,124 1,912 -10.0%

Dried baby food & nutrition supplements56 50 -10.0% 56 50 -10.0%

Baby care products 25 23 -10.0% 25 23 -10.0%

S&D costs -2,074 -1,884 -9.2% -2,016 -1,743 -13.6%

G&A expenses -313 -267 -14.8% -334 -263 -21.1%

EBIT 1,700 1,342 -21.1% 2,167 1,248 -42.4%

PBT 1,191 830 -30.3% 1,856 782 -57.9%

Income tax -334 -232 -30.3% -520 -219 -57.9%

Minority interest -135 -109 -19.6% -183 -98 -46.3%

Net profit 722 489 -32.4% 1,154 465 -59.7%

Gross Margin 61.7% 61.8% 0.0% 61.7% 61.8% 0.1%

Probiotic supplements 66.4% 66.4% 0.0% 66.4% 66.4% 0.0%

Infant formulas 63.3% 63.3% 0.0% 63.3% 63.3% 0.0%

Dried baby food & nutrition supplements49.2% 49.2% 0.0% 49.2% 49.2% 0.0%

Baby care products 22.8% 22.8% 0.0% 22.8% 22.8% 0.0%

S&D/sales 30.0% 31.8% 1.8% 26.7% 31.6% 4.9%

G&A/sales 4.5% 4.5% 0.0% 4.4% 4.8% 0.4%

EBIT margin 24.6% 22.7% -1.9% 28.7% 22.6% -6.1%

tax rate 28.0% 28.0% 0.0% 28.0% 28.0% 0.0%

Net profit Margin 10.4% 8.3% -2.2% 15.3% 8.4% -6.9%

2016E 2017E

Rmb mn 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

China's VMS market size 109,348 120,152 132,052 144,751 157,939 171,554 185,279 196,395 206,215 214,464 223,042 229,734

- 9.9% 9.9% 9.6% 9.1% 8.6% 8.0% 6.0% 5.0% 4.0% 4.0% 3.0%

Online shares 19.0% 22.0% 24.0% 26.0% 27.0% 27.5% 28.0% 28.5% 29.0% 29.4% 29.8% 30.0%

Online market size 20,776 26,433 31,693 37,635 42,644 47,177 51,878 55,973 59,802 63,052 66,467 68,920

- 27.2% 19.9% 18.8% 13.3% 10.6% 8.0% 6.0% 5.0% 4.0% 4.0% 3.0%

Swisse's online shares 4.3% 3.0% 1.0% 1.3% 1.6% 1.7% 1.8% 1.9% 2.0% 2.1% 2.2% 2.3%

Swisse's online sales in China 884 793 317 489 682 802 934 1,063 1,196 1,324 1,462 1,585

- -10.3% -60.0% 54.4% 39.5% 17.5% 8.0% 6.0% 5.0% 4.0% 4.0% 3.0%

Offline

Offline shares 28.0% 25.5% 24.0% 22.5% 22.0% 22.0% 22.0% 21.5% 21.0% 20.6% 20.2% 20.0%

Offline market size 30,617 30,639 31,693 32,569 34,747 37,742 40,761 42,225 43,305 44,180 45,055 45,947

0.1% 3.4% 2.8% 6.7% 8.6% 8.0% 6.0% 5.0% 4.0% 4.0% 3.0%

- - 0.1% 0.6% 1.0% 1.4% 1.6% 1.8% 2.0% 2.1% 2.2% 2.3%

Swisse's offline sales in China - - 32 195 347 528 652 760 866 928 991 1,057

- - - - 77.8% 52.1% 8.0% 6.0% 5.0% 4.0% 4.0% 3.0%

direct sales penetration 53.0% 52.5% 52.0% 51.5% 51.0% 50.5% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%

indirect sales penetration 47.0% 47.5% 48.0% 48.5% 49.0% 49.5% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%

Swisse's revenue in China 884 793 349 685 1,030 1,330 1,586 1,824 2,062 2,252 2,453 2,642

- -10.3% -56.0% 96.4% 50.4% 29.2% 19.2% 15.0% 13.1% 9.2% 9.0% 7.7%

Swisse's Aus and NZ sales 1528 1558 1590 1621 1654 1687 1721 1755 1790 1826 1862 1900

- 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Swisse's topline 2,412 2,351 1,938 2,306 2,684 3,017 3,307 3,579 3,852 4,078 4,316 4,542

-2.5% -17.6% 19.0% 16.4% 12.4% 9.6% 8.2% 7.6% 5.9% 5.8% 5.2%

695 991 1382 1758 2155 2516 2822 3103 3333 3553 3733

35 50 69 88 108 126 141 155 167 178 187

YoY growth rate

Online

YoY growth rate

YoY growth rate

YoY growth rate

YoY growth rate

Swisse's offline shares

YoY growth rate

YoY growth rate

Swisse's sales in 20 countries under

JV with PGT Healthcare

Swisse's commission of sales @5%

(commission booked under other

income category in IS)

YoY growth rate



6

Figure 6: Key assumptions


Figure 7: Forward P/E Figure 8: Forward P/B

Source: Bloomberg, company data, CICC Research Source: Bloomberg, company data, CICC Research

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Revenue (Rmb mn) 5,923 5,510 5,878 6,255 6,589 6,878 7,150 7,424 7,650 7,888 8,113 Probiotic supplements 350 350 350 350 350 350 350 350 350 350 350 Infant formulas 3,020 3,020 3,020 3,020 3,020 3,020 3,020 3,020 3,020 3,020 3,020 Dried baby food & nutrition supplements 102 102 102 102 102 102 102 102 102 102 102 Baby care products 99 99 99 99 99 99 99 99 99 99 99 Swisse 2,351 1,938 2,306 2,684 3,017 3,307 3,579 3,852 4,078 4,316 4,542 Gross profit 3,659 3,405 3,631 3,862 4,067 4,244 4,411 4,579 4,717 4,863 5,001 S&D expenses 1,884 1,743 1,828 1,923 2,017 2,075 2,122 2,168 2,204 2,242 2,276 G&A expenses 267 263 255 269 339 377 401 493 513 534 546 EBIT 1,342 1,248 1,416 1,557 1,618 1,717 1,828 1,944 2,037 2,136 2,237 Net profit 489 465 570 662 738 835 931 1,030 1,119 1,210 1,286 Biostime IMF segment etc. 386 385 385 385 386 386 386 386 386 386 386 Swisse 531 479 555 619 665 733 801 871 931 993 1,053 Financial costs 594 554 514 474 434 394 354 314 274 234 213

YoY growthRevenue 22.9% -7.0% 6.7% 6.4% 5.3% 4.4% 4.0% 3.8% 3.0% 3.1% 2.9% Biostime IMF segment etc. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Swisse -17.6% 19.0% 16.4% 12.4% 9.6% 8.2% 7.6% 5.9% 5.8% 5.2%Gross profit 22.6% -6.9% 6.6% 6.4% 5.3% 4.4% 3.9% 3.8% 3.0% 3.1% 2.8%EBIT 148.8% -7.0% 13.4% 10.0% 3.9% 6.1% 6.4% 6.3% 4.8% 4.8% 4.7%Net profit 94.3% -4.9% 22.6% 16.2% 11.4% 13.2% 11.5% 10.6% 8.6% 8.2% 6.2% Biostime IMF segment etc. -0.2% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Swisse -9.8% 15.9% 11.4% 7.5% 10.3% 9.2% 8.8% 6.9% 6.8% 6.0%

MarginsGross Margin 61.8% 61.8% 61.8% 61.7% 61.7% 61.7% 61.7% 61.7% 61.7% 61.7% 61.6% Probiotic supplements 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% 66.4% Infant formulas 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% 63.3% Dried baby food & nutrition supplements 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% 49.2% Baby care products 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% Swisse 61.3% 61.3% 61.3% 61.3% 61.3% 61.3% 61.3% 61.3% 61.3% 61.3% 61.3%S&D expenses/Sales 31.8% 31.6% 31.1% 30.7% 30.6% 30.2% 29.7% 29.2% 28.8% 28.4% 28.1%G&A expenses/Sales 4.5% 4.8% 4.3% 4.3% 5.1% 5.5% 5.6% 6.6% 6.7% 6.8% 6.7%EBIT margin 22.7% 22.6% 24.1% 24.9% 24.6% 25.0% 25.6% 26.2% 26.6% 27.1% 27.6%Effective tax rate 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%Net profit margin 8.3% 8.4% 9.7% 10.6% 11.2% 12.1% 13.0% 13.9% 14.6% 15.3% 15.8% Biostime IMF segment etc. 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Swisse 22.6% 24.7% 24.1% 23.1% 22.0% 22.2% 22.4% 22.6% 22.8% 23.0% 23.2%

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Jan

-15

Ap

r-15

Ju

l-1

5

Oct-

15

Jan

-16

Ap

r-16

X

+1SD

-1SD

Average

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan

-11

Ap

r-11

Jul-1

1

Oct-

11

Jan

-12

Ap

r-12

Jul-1

2

Oct-

12

Jan

-13

Ap

r-13

Jul-1

3

Oct-

13

Jan

-14

Ap

r-14

Jul-1

4

Oct-

14

Jan

-15

Ap

r-15

Jul-1

5

Oct-

15

Jan

-16

Ap

r-16

X

+1SD

-1SD

Average



7

Appendix 1: notes from conference call with key industry figure

Key Takeaways from the Conference Call: policy change on cross-border e-commerce and its influence on related industries.

Reasons why Chinese government tightened cross-border e-commerce policies

► Previous policies were unfair: the introduction of the new policy is to eliminate previous policies’ inequities, which can be reflected in the following two aspects:

Previously, imported goods that retailed online via cross border e-commerce sites were treated as personal postal articles and were subject to parcel tax with a tax exemption of Rmb50. While ordinary imported goods are subject to import taxes including tariffs, 17% import value-added tax (VAT) and consumer tax.

Unfairness between different enterprises. Without uniform legislation, different regimes and ports had different regulations, which could lead to unfair taxation and product categories. The new tax scheme sets the uniform regulations and cancels the tax exemption of Rmb50, thus eliminating the unfairness.

► Normalization: it’s improper for cross-border e-commerce (one category of merchandise trade) to be subject to parcel tax, since this is set for personal items. Thus it is more normative for cross-border e-commerce to adopt VAT + consumption taxes, which are charged at 70% of the taxable amount under the general trade model. The dutiable value is the final retail price (dutiable values of ordinary imported goods are CIF prices).

Reasons why the policies were released now

At last September’s State Council meeting it was generally decided to implement this policy after the "Two Sessions”. By the end of 2015, the observation period for cross-border e-commerce had reached three years, as the government set (China began to plan cross-border e-commerce trade at the end of 2012 and formally started it in July 2013), thus, its release now is within our expectations. While the release of the positive list was precipitated, since the large numbers of related departments involved (11 departments in the first positive list and 13 departments in the second positive list) and the interests all parties are hard to balance.

Supplementary instructions to the positive list

► Supplementary instructions for the first positive list: 1) for infant formula milk (IMF) powders, the saying "except unregistered infant formula milk that needs to be registered according to Food Safety Law" was explained in detail, stating that the imported IMF through cross-border e-commerce should be subject to the new regulations on IMF registration (implemented on January 1, 2018); and, 2) the first-time imported cosmetics require special registration. “The first-time imported cosmetics" can be found through the China’s Food & Drug Administration (CFDA) Website.

► Supplementary instructions for the second positive list. In general, all the goods imported through cross-border e-commerce should be in compliance with the



8

current regulations. For example, importing health food via cross-border e-commerce requires legal licenses or filings under the food safety law.

► Specific explanations by Ministry of Finance (MoF).

► The “negative list”. The Law of PRC on the Entry & Exit of Animal & Plant Quarantine published by China's General Administration of Quality Supervision, Inspection, & Quarantine (AQSIQ) put strict regulations on the directly-purchased imports though parcels - the import of products such as liquid milk, live animals and plants through direct purchasing parcel mode are strictly forbidden, given the domestic ecology protections.

► Customs edited and published “several issues need to be cleared in the new tax policies". To ensure the smooth transition, the goods in transportation before April 8 can be subject to the previous regulations since the release of positive list was relatively rushed.

Follow-up policies

The general direction will remain unchanged with minor follow-up adjustments. The positive list may also be adjusted and we do not exclude the possibility of expanding the scope of products included in the positive list; while the scope of goods on the negative list would not be expanded in principle.

Difference between direct purchase imports through cross-border e-commerce

and in parcel model

There are two clearance modes for cross-border e-commerce: B2B2C mode (BBC) , also known as “Bonded Warehouse Import” and B2C mode (BC), also known as “Direct Purchase Import”, which is generally the same as direct purchase import via personal parcel mode.

The differences between these two direct purchase import modes are:

► BC through cross-border e-commerce is regulated by the positive list, while direct purchase imports via parcel mode are subject to the negative list (The Law of PRC on the Entry & Exit Animal & Plant Quarantine).

► BC through cross-border e-commerce requires electronic orders, payment documents and freight notes; while parcel mode just needs shopping receipts, the ID of recipients and an express sheet.

By comparison, the BC mode through cross-border e-commerce can provide less product categories than parcel mode, while goods processing capacity of parcel channel is limited since which is mainly open to individuals.

Can direct purchase mode of parcel channel avoid the new tax policies?

To support the implementation of the new cross-border e-commerce policies, the Customs and other departments have issued a series of regulations to strictly regulate parcel channels including: 1) on March 15, the personal belongings are started to accept strictly custom inspection under the existing law; 2) on March 16, parcel tax adjustments. The tax brackets have been reduced from four levels (10%, 20%, 30%, and 50%) to three (15%, 30% and 60%) and the tax is increased overall. The tax rate of food increases from 10% to 15% (Rmb50 tax exemption is retained); and, 3) on March 24, the notice of introducing



9

a new express inspection system. From June 1, 2016, the new express inspection system will go into use, which can realize information management and higher efficiency. To sum up, the parcel channels are limited by related departments to support the cross-border e-commerce policies, so it’s not easy to avoid the new tax policies on a large scale.

Influence of tightening policy on practitioners of cross-border

e-commerImpacts on imported IMF industry

The main problem of the IMF industry is the formula registration regulations, which require imported IMF products to meet the national food safety law. There will be no significant differences between the cross-border e-commerce mode and general trade model when the goods are in compliance with national legislation. Enterprises can measure both the advantages and disadvantages of the two modes to choose which to use. The BBC mode through cross-border e-commerce channels is convenient for returning goods and less tax, while the general trade mode has lower warehousing costs and other operating costs.

Impacts on imported health food industry

The CFDA’s supplementary instructions to the second positive list stated that according to the food safety law, online imported health food through cross-border e-commerce channels requires registration or filing. The CFDA has announced a draft on the registration and filing regulations for health food, which will be implemented from July 1, 2016 and both apply to imported health food through the general trade and cross-border e-commerce channels. The registration process will take at least a year under the normal procedures and the costs are relatively high. While the filing process will be relatively fast. Detailed product categories still need further specification by the CFDA.

Specific tax calculations

The tariff rate is zero. The tax calculation of general trade: Consumption Tax = dutiable value / (1-consumption tax rate) × consumption tax rate; VAT = (dutiable value + consumption tax) × VAT rate. Consumption tax and VAT of cross-border e-commerce imports are equal to the statutory amount multiplied by 0.7. The dutiable value of cross-border e-commerce is the final retail price, while that of general trade is the CIF price. The final tax rates on most goods are 11.9%, cosmetics are 47% and other high-end goods – such as diamonds and golf balls – are 21%. Tax policies will remain generally unchanged with some minor adjustments.

What are the impacts on goods delivering time under the new policies?

If the cross-border e-commerce enterprises can only deliver the goods through BC mode instead of BBC mode, the impact will be significant. Overseas direct delivery takes at least five days (IATA) and 7~14 days in general, while BBC mode takes less than 3 days. The parcel channel is unstable and takes a longer time than the cross-border BC mode. A seven-day delay may hurt the enthusiasm of potential consumers for overseas products.

How do the enterprise to deal with the new tax scheme?

1) Price hike to ensure profits; 2) disposal of goods at reduced prices for fear of policy uncertainties; and, 3) search for opportunities in direct purchase import via parcel channels. Few enterprises will cover the cost rises themselves.



10

Figure 9: understand bonded area import and direct post mode under cross-border e-commerce as well

as the parcel channel

Source: iResearch, Company data, CICC Research

B2B2C mode B2C mode

Overseas bulk purchasing,

storage

Entering through international air

freight, maritimetransportation

Bonded customs declaring

Centrally stored in bonded areas

Consumer ordering

Orders sorting, packaging, and

labeling

Bonded customs clearance

Domesticdelivery

consumer ordering

Orders sorting, packaging, and

labeling

Goods arrived at Chinese airports through air freight

Goods entering into customs supervise

d warehouse

Postal system clearance

Express companiesclearance

Domesticdelivery

Entering into China

Overseas purchasing

National postal systemInternational commercial express

Entering into China

Commercial express companies

EMS

Parcel mode (direct delivery)

consumer ordering

Register transit company, obtain overseas delivery address

Overseas online platforms delivery goods to the transit company

Cross-border transportation by transit company

Goods arrive at HK/Vietnam airports through air freight

Take delivery of goods from HK/ Vietnam warehouse

Water guestscarrying

smuggling

Maritime /landtransportation bulk smuggling

Entering into China

Domestic delivery

Gray clearance part

Overseas purchasing

Supplier delivering goods to overseas pickup terminals

Goods arrived at Chinese airports through air freight

Goods entering into customs supervised warehouse

Entering into China

Domesticdelivery

Submit formal declaring materials and customs release



11

Appendix 2: a glimpse at Ningbo Customs’ policy

Notice on inspection and quarantine supervision on cross-border e-commerce in Ningbo

► To ensure a smooth transition, the goods sent since April 8 but yet to arrive are subject to Ningbo’s previous cross-border e-commerce regulations.

► Imported goods delivered after April 8 through cross-border e-commerce channels (including bonded warehouse imports and direct purchase imports) shall meet the requirements of the positive list; goods not included in this list are not allowed to be imported through cross-border e-commerce channels.

► Goods imported through the bonded area channel require full declaration, and the requirements of the declaration materials will be in accordance with the general trade-related provisions. The goods which comply with the law will be issued clearance forms or otherwise; at the same time, the inspection and quarantine will be in accordance with the general trade regulations and AQSIQ’s cross-border e-commerce related regulations.



12

Appendix 3: guidelines of government notice against illegal cross-border online shopping

State Council issued document to Strike Hard on “gray cross-border online

shopping”

The State Council recently issued the 2016 Action Plan for Implementation of Outline for Quality Development, of which its "foster quality and new advantages of brand competition" part clearly states that "to strengthen the supervision of postal delivery and express in cross-border online transactions, to crack down on illegal courier smuggling activities on the use of e-commerce platforms and postal delivery and express in cross-border e-commerce".

Source: http://www.gov.cn/zhengce/content/2016-04/19/content_5065730.htm

CICC Research

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