• Strong jump in earnings
• Guiding for 20-30% growth
• Higher FV of HK$22.90

Strong FY17; in Line With Expectations

CSPC Pharmaceutical Group (CSPC) delivered a strong 32% spike in its FY17 net earnings to HK$2,771m, which is in line with our projection of HK$2,816m. The strong growth was achieved on the back of a 25% jump in revenue to HK$15,463m. Gross margin also showed a big improvement from 51% in FY16 to 60.4% in FY17. Finished Drugs posted a sharp increase in revenue, up 27% to HK$11,374m and accounted for 74% of total group revenue.

Innovative Drugs rose 38% to HK$6,582m, while Generic Drugs gained 14% to HK$4,792m. In the Bulk Drugs segment, the group also saw good revenue growth of 20% to HK$4,088m. Management has declared a final dividend of HK 15 cents versus HK 12 cents in FY16. Operating profit margin improved from 21.5% in FY16 to 22.5% in FY17.

Guidance of 20-30% Growth

After a stellar FY17, management remains optimistic about its prospects for FY18 and beyond. Management is guiding for growth of 20-30%, and FY18 also marks the first year of its new 5-year plan. Management shared that they are open to explore acquisition opportunities in the biopharmaceutical area and is also positive on the outlook and demand for oncology drugs.

Strong Outperformance Since We Initiated Coverage

Since we initiated coverage on 1 Nov 2017, the stock has moved up from HK$13.56 to the current price of HK$20.20 (as at 19 Mar 2018), up 49% in less than five months. Its strong FY17 results reflected the growth and penetration of its Finished Drugs, which will continue to be the key growth driver.

As the FY17 results were in line with our expectations, we are retaining our projections for FY18 and FY19. We are projecting net earnings of HK$3,555m (+28%) and HK$4,386m (+23%) for FY18 and FY19, respectively. Earnings growth will continue to come from higher sales and sustained healthy operating margins.

With the re-rating for the industry, valuations of its peers have moved up and we have correspondingly raised our valuation peg from 32x FY18 earnings to 36x FY18/19 earnings. This is still lower than current industry average of 37x for FY18 earnings. Based on 36x P/E, our fair value estimate moves up from HK$17.40 to HK$22.90.

Source: OCBC Research - 20 Mar 2018