Yestar:Rising star in medical era

Transitioning into medical focuses enterprise.

Yestar, the key partner of Fujifilm’s imaging product in China, istransitioning from traditional color photographic papers to medicalfocused, including imaging products and the newly acquired diagnosticproduct distribution business. Leveraging on rapid demand growth formedical devices/consumables and future M&A potentials, Yestar is likelyto maintain strong earnings momentum in 2015 and onwards, after theestimated >40% growth in 2014 from profit alert just announced.

Company background.

Yestar is a leading processor and distributor of Fujifilm products in China,including medical imaging (48.6% of 1H14 revenue), color photographicpapers (35.6%) and industrial imaging (14.4%), under Fujifilm brand and/orYes!Star brand. Leverage on the family’s long relationship with Fujifilm, itlogged a 31%/50% 2010-13 revenue/profit Cagr amid rising market share.

The transition.

Medical imaging products become the largest segment now, leveraging on thestrong demand for medical products amid increasing health consciousness,and offset the slowing growth of maturing color photographic paper andindustrial imaging products. Besides, Yestar acquired 70% of Jiangsu Uno,which distributes IVD products of global leading brands, Roche and BD, inJiangsu and Anhui. The PRC medical device industry achieved a 22.8% Cagrfrom 2001-13 with momentum likely to maintain. In particular, Chinese IVDmarket size is expected to be doubled over its market size in 2013.

Medical business to fuel growth.

Medical films have lower GPM than other imaging products given onlyprocessing mark-up, but higher OPM due to only one customer (Fujifilm).

Jiangsu Uno will be consolidated into Yestar’s results since Nov 2014 with fullyearcontribution in 2015. Yestar will also continue to look for further M&Aopportunities in medical devices/consumables, which will speed up transitioninto medical focused enterprise, and fuels further earnings growth.

Investment view.

Our back-of-the-envelope forecasts suggested Yestar is trading at 20x fwd PE,slightly above the average 17x for HK/US listed Chinese medical device peers.

Meanwhile, given strong growth profile (0.7x PEG) and more M&A potentials,the stock is still interesting if it can deliver earnings and execution ability.