• Strong set of 2Q
• Healthy pipeline of new products
• CSPC will continue to deliver

2Q18 Ahead of Consensus

CSPC Pharmaceutical Group [1093 HK] posted 2Q18 net earnings of HK$936m, +2% QoQ and +40% YoY, and 5% above consensus estimate of HK$887m (based on Bloomberg). The strong momentum from 1Q has continued into 2Q. For 1H18, revenue grew 49.8% to HK$10,787m, while gross profit jumped 67.1% to HK$6,891m.

Gross profit margin showed a strong improvement from 57.3% in 1H17 to 63.9% in 1H18. Net profit rose 41.1% to HK$1,853m. The finished drug business is a key driver and delivered strong sales growth of 55.2% to HK$8,182m.

Innovative drug products sales grew 65.3% to HK$4,874m. Revenue from innovative drugs now accounted for 45.2% of total group revenue versus 40.9% in 1H17. As at 30 June 2018, bank balances and cash amounted to HK$4,400m with net cash position of HK$3,461m. Gearing ratio decreased from 6.4% half year earlier to 5.6% as at 30 June 2018.

Deepening Its Sales Penetration

For its innovative drugs, “NBP” (恩必普), is a Class 1 new drug and a patent-protected exclusive product which is used for the treatment of acute ischemic stroke. “Oulaining”（歐來寧) is mainly used for the treatment of mild to moderate memory and mental impairment.

For its innovative drugs, the group has been expanding its sales force and also developing and expanding the market for its products at the county-level hospitals and community medical centres. For the rest of its businesses, sales growth was fairly stable.

R&D and Acquisitions

The group is maintaining its R&D focus, and there are currently more than 200 new products in the pipeline, focusing on cardiocerebrovascular diseases, metabolic diseases, oncology, psychiatry and neurology, as well as anti-infection. Management is also keen to explore acquisitions and have identified some potential targets, mainly focusing on drugs of new small molecule and macromolecule which are close to product approval and launch.

As 2Q was in line with our expectations, we are maintaining our estimates. Management guided that earnings will likely exceed its guidance at the beginning of the year. Recently, the China Healthcare sector was affected by negative developments (see link below). In tandem with the sector de-rating, CSPC shares were unfortunately hit too.

We are maintaining our earnings estimates, but with the massive sector de-rating, we have lowered the valuation peg to its 3-year average of 30x, and this lowers our fair value estimate from HK$28.24 to HK$21.88. Current PEG is reasonable at 0.85.

Source: OCBC Research - 21 Aug 2018