Hugel and Humedix both generated strong 1Q16 sales growth

　　China cosmetic surgery trip takeaways; competition seems tightbut early entrants should enjoy the favourable market dynamics

　　Hugel (Buy, TP KRW430,000) and Humedix (Buy, KRW70,000)remain our preferred picks in the sector

　　Strong 1Q16 results: Both Hugel and Humedix generated strong revenues led by fastgrowth for facial injectable products. While there is no meaningful consensus available,1Q16 revenue for both companies beat our revenue estimates by 13% (Hugel) and 7%(Humedix). Considering that 1Q is a seasonally weak quarter and that demand for bothbotulinum toxin (BTX) and hyaluronic acid (HA) fillers are accelerating, we are confidentthat Hugel’s and Humedix’s annual earnings will reach our 2016 full-year expectations.

　　Hugel: Hugel reported 1Q16 sales of KRW23bn and OP of KRW9bn. Looking at BTXand HA filler revenue only, it came in at KRW20bn, up 175% y-o-y from just KRW7bn in1Q15. Sales for both BTX and HA filler products from overseas markets appear to beincreasing rapidly. Hugel’s OPM remained solid at 39% in 1Q16.

　　Humedix: Humedix’s 1Q16 sales and OP each came in at KRW10.7bn and KRW3.5bn.

　　Sales were up 27% y-o-y, led by solid anti-osteoarthritis medicine sales (up 35% y-o-y)and dermal filler sales (up 14% y-o-y). Humedix’s OPM improved to 32% from 29% in1Q15 due to growing sales of higher-margin anti-osteoarthritis medicine and HA fillers.

　　China cosmetic surgery trip takeaways: We visited China cosmetic surgery companiesand some industry experts in Beijing and Shanghai last week. Our takeaways from thetrip were: 1) BTX and HA filler are the most popular procedures in China given their safetyand convenience features. 2) Restylane was the most preferred HA filler brand despite its2-3x higher price vs. other fillers. The average price for HA filler in China is cUSD540versus Korea USD100. We think there could be further price pressure. 4) In the BTXmarket, Botox (Allergan) appeared to have dominant presence. Botox costs USD1,400 vsUSD540 for BTXA (Lanzhou) in private hospitals. Medy-tox’s (086900 KS, KRW443,000,Buy) and Hugel’s BTX costs cUSD100 in Korea. We especially think Korean BTX makerswill gain rapid market share once they launch their products in China given the limitedcompetition. The favourable recognition for Korean brands will also help to boost sales.

　　Hugel and Humedix remain our preferred sector picks: We remain Buy on Hugel (TPKRW430,000) and Humedix (TP KRW70,000). We like Humedix for its presence in China.

　　We also like Hugel for its margin upside potential as it expands its global presence.