Time To Worry? Analysts Just Downgraded Their Luye Pharma Group Ltd. (HKG:2186) Outlook

The latest analyst coverage could presage a bad day for Luye Pharma Group Ltd. (HKG:2186), with the analysts making across-the-board cuts to their statutory estimates that might leave shareholders a little shell-shocked. Revenue estimates were cut sharply as the analysts signalled a weaker outlook - perhaps a sign that investors should temper their expectations as well.

Following the downgrade, the most recent consensus for Luye Pharma Group from its eight analysts is for revenues of CN¥6.2b in 2021 which, if met, would be a notable 11% increase on its sales over the past 12 months. Prior to the latest estimates, the analysts were forecasting revenues of CN¥7.0b in 2021. The consensus view seems to have become more pessimistic on Luye Pharma Group, noting the substantial drop in revenue estimates in this update.

See our latest analysis for Luye Pharma Group

We'd point out that there was no major changes to their price target of CN¥4.88, suggesting the latest estimates were not enough to shift their view on the value of the business. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. Currently, the most bullish analyst values Luye Pharma Group at CN¥9.16 per share, while the most bearish prices it at CN¥3.75. With such a wide range in price targets, the analysts are almost certainly betting on widely diverse outcomes for the underlying business. With this in mind, we wouldn't rely too heavily on the consensus price target, as it is just an average and analysts clearly have some deeply divergent views on the business.

Another way we can view these estimates is in the context of the bigger picture, such as how the forecasts stack up against past performance, and whether forecasts are more or less bullish relative to other companies in the industry. We would highlight that Luye Pharma Group's revenue growth is expected to slow, with the forecast 11% annualised growth rate until the end of 2021 being well below the historical 20% p.a. growth over the last five years. Compare this against other companies (with analyst forecasts) in the industry, which are in aggregate expected to see revenue growth of 18% annually. So it's pretty clear that, while revenue growth is expected to slow down, the wider industry is also expected to grow faster than Luye Pharma Group.

The Bottom Line

The most important thing to take away is that analysts cut their revenue estimates for this year. They're also anticipating slower revenue growth than the wider market. Often, one downgrade can set off a daisy-chain of cuts, especially if an industry is in decline. So we wouldn't be surprised if the market became a lot more cautious on Luye Pharma Group after today.

That said, the analysts might have good reason to be negative on Luye Pharma Group, given its declining profit margins. For more information, you can click here to discover this and the 3 other risks we've identified.

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