Adjust target price to RMB85.5 from RMB85.8; risks

We believe recent stock weakness represents an enhanced opportunity to buy,as the gap between Hengrui and other bellwethers has become wider based onrecent pipeline progress, in our view. Our PT is based on 64x 2019E EPS. Webelieve Hengrui deserves a premium on the multiple given the superior value ofits products and its strong pipeline, and its A-share peers are trading at 31x 2019EEPS with 19% growth in 2020 (vs. 25% we model for Hengrui). Key risks includeregulatory delays, setback in gastric and ESCC for PD-1, as well as price cut andcompetition.

What are inline? revenue growth, SBC and OPM are largely inline.

What's ahead of us in 2H18? 1) SBC (stock based compensation) expensewas RMB161m in 1H18 while full year budget is 187m, as such NP shallhave a better base for 2H18; 2) apatinib weakness should have beenreflected in consensus due to NRDL inclusion of Avastin and anlotiniblaunch. We expect downward adjustment of peak sales estimate ofconsensus; 3) significant GM expansion is unlikely until after multiple newdrug launches in 2019, as price cuts of oncology drugs may offset theupside.

What's beat? GM improved to 86.7% from 86.4%, which is partially dueto VAT reduction. We do not think this will continue for 2H18 as price cutmay offset this.

Hengrui registered sales/core profit of RMB3.9bn/924m in 2Q18, representing YoYgrowth of 23%/21%. This suggests acceleration from 22%/12% growth achievedin 1Q18. Core profit would reach RMB2.0bn with 29% YoY growth (apple to applecomparison) in 1H18, if we were to exclude stock compensation expense andinvestment income from financial products. The company indicated 15-20%, 30%,21% and stable growth for oncology, anesthetics, contrast agents and exportbusiness respectively for 1H18.

Solid quarter; the beat, inline and the miss

What missed? We estimate apatinib sales were around RMB830m,representing 16% YoY growth which is below street expectation of40-50% growth, and 45% growth per Rx data.