Solid growth from insulin franchise; reiterating Buy    Tonghua Dongbao (THDB) reported sales/core profit of RMB671m/239m in 3Q17,vs. our estimates of RMB673m/214m, respectively. These represent YoY growthof 14%/31% in 3Q17, vs. 33%/32% in 1H17for revenue and core profit. Givensteady performance of insulin franchise, the overall revenue growth was slowerdue to higher base in 3Q16, where the company had one-time revenue from realestate business and transfer of assets. We note robust profit growth was alsodriven by margin expansion and continued efficiency improvement. Importantly,insulin glargine filed for production in October, with estimated launch in 2H18and meaningful contribution in 2020.    Smooth ramp-up of insulin franchise; insulin glargine launch expected in 2H18    According to the company, insulin products achieved sales of RMB537m in 3Q17vs. RMB447m in 3Q16, representing 20% YoY growth. Insulin needles and teststrips registered growth of over 30% and a bit under 20% respectively in 3Q17, vs.30%/20% in 2Q17. Management expects Gansulin 40R to reach RMB100m salesin 2017and 30R to maintain 15% full-year growth. For third-generation insulin,THDB filed production approval for insulin glargine on October 10, expectinglaunch in 2H18and meaningful contribution in 2020. The company is on trackwith insulin aspart and has selected hospitals to conduct clinical trials for 30R.Additionally, insulin detemir received IND approval on October 20. Managementsuggested that insulin aspart 30R would be the next focus after the launch ofinsulin glargine, as currently the two take up 90% of insulin market in China.    Expecting stable margins ahead    GM/OPM stood at 75.7%/43.9% in 3Q17vs. 72.8%/40.0% in 3Q16. Managementattributed the hike to slower recognition of expense items from 1H17.Improvement in OPM was mainly driven by 198bps of savings on sellingexpenses. Management guided for stable margins ahead, with 1-2% ASP cutsfrom provincial tenders.    Raising price target to RMB25.4from RMB23.7; risks    Our PT is based on 45x 2018E EPS (vs. 42x previously), due to sector re-ratingand regulatory progress of third-generation insulin products. The A-share peersare trading at 36x (vs. 28x previously) with 24% growth in 2018E (vs. 21% forTHDB). In our view, the premium is justified by sustainable growth of the insulinfranchise, ramp-up of CDMP and a compelling risk profile. Key risks: larger-thanexpectedASP erosion, growth slowdown and product launch delays.

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