Broker snap: Growth expected for Hutchison Chi-Med

8th Nov 2010 12:36

Panmure Gordon thinks Hutchison China Meditech's (Chi-Med) subsidiary MediPharma is "on the cusp of transformation" and has upgraded its target price from 400p to 600p.Chi-Med announced Monday that the investment arm of Japanese conglomerate Mitsui will invest $12.5m directly into MediPharma in return for preference shares that convert to 12.2% of the subsidiary's share capital.The investment implies a valuation of $100m for Chi-Med's drug development subsidiary, surpassing the broker's current $80m figure.Analyst Savvas Neophytou hopes this will be the "first step in unlocking significant shareholder value from MediPharma". "Mitsui's investment, which values at 124p per Chi-Med share, should be a catalyst for the market to focus on the full value of Chi-Med's consumer healthcare business", Neophytou said.The broker says that although some investors may find the valuation of such companies unrealistic (trading at 40-60 times price to earnings ratios), consumer healthcare in China is the one area of "real growth in healthcare currently". "In a deflationary environment in most other mature economies of the West, 40-60 times is the going rate for that sort of clean growth".MediPharma could also see a "lucrative licensing deal" for its inflammatory bowel treatment drug HMPL-004 which is expected in the next 12-16 weeks. This could provide "further external investment in what we perceive to be an excellent drug development business by anybody's standards", the broker said.With its current value believed to be understated, the broker has reiterated its 'buy' recommendation and increased its target price to 600p, from 400p.