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Author: kimeng   |   Latest post: Mon, 10 Dec 2018, 10:23 AM

 

CSPC Pharmaceutical (1093 HK): Bitter Pill to Swallow Now; Focus Medium Term

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  • 3Q below street estimate
  • Guidance largely unchanged
  • Management is fairly optimistic

3Q18 Below Consensus

CSPC Pharmaceutical Group [1093 HK] posted 3Q18 net earnings of HK$881m, -6.6% QoQ and -0.4% YoY, and below consensus estimate of HK$994m (based on Bloomberg). 3Q18 revenue fell 6.3% QoQ to HK$5,061m, while gross profit improved 6.9% to HK$3,434m. Gross profit margin improved from 53.5% in 2Q18 to 67.8% in 3Q18.

For the 9-month period, gross margin improved from 58.5% to 65.1%. Revenue rose 41.1%, while net profit increased 33.8% to HK$2,044m. Finished Drug remained its key business and accounted for 77% of revenue and 76% of profits. However, Finished Drug margin eased off from 25.2% in 9MFY17 to 21.1% in 9MFY18.

Sticking With Its Guidance

For its innovative drugs, “NBP” (恩必普), which is a Class 1 new drug and a patent-protected exclusive product used for the treatment of acute ischemic stroke, management is aiming for FY18 sales of HK$5b, with growth of 20-25% expected for FY19. For “Oulaining”(歐來寧), which is mainly used for the treatment of mild to moderate memory and mental impairment, management is planning to change its sales strategy from agents to direct sales.

In terms of R&D, the group has already used HK$1.1b so far this year and the full year number is guided to be slightly ahead of HK$1.2b. We are estimating R&D to be around HK$1.4b. It is also continuing with its strategy to increase the penetration rate into more hospitals.

Fair Value of HK$20.35

As 3Q18 were slightly below our expectations, we have lowered our FY18 estimates from HK$3,845m to HK$3,625m, down 5.7%. The China Healthcare sector was recently sold down due to impending policy changes which could affect some products, including 3 from CSPC. Management has shared that its market shares for these 3 products are small and are unlikely to impact overall group sales.

With the de-rating of the sector, the sector is trading at about 31x 2- year blended earnings. Earnings growth is projected at 30.8% this year and 25.9% next year.

Total return for CSPC YTD is 9.0% versus -3.6% for its peers. Based on 31x earnings, our fair value estimate for the stock is HK$20.35.

Source: OCBC Research - 20 Nov 2018

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