• 9M earnings growth of 22%
• Challenging environment ahead
• Limited near term price drivers

3Q18 Net Earnings Rose 19%

Sino Biopharmaceutical Ltd posted 9-mth net earnings of RMB2,201.3m, up 22%. Revenue rose 37% to RMB15,730.2m. Sales of new products accounted for about 18.1% of its revenue. The group has declared 3Q dividend of HK2 cents, bringing the total to HK6 cents for the first three quarters of the year.

Gross margin improved slightly from 79.1% in 9M17 to 80.4% in 9M18. While pre-tax profit margin also showed an improvement YoY, net profit margin fell from 15.8% to 14.0%. For 3Q18, net earnings rose 18.6% to RMB835.6m, while revenue rose 51.5% to RMB6,004.9m. Cash and bank balances as at 30 Sep 2018 was approximately RMB6,300.78m.

Medical Reforms; Challenging Operating Conditions

Management highlighted in its 3Q results that medical reform continues, including enhancing the quality but lowering the price of pharmaceuticals and controlling medical insurance expenditures.

For key monitored drug types, the lowest prices in the country will be taken as reference as well as the adoption of centralised procurement policy in price negotiations. Together with this, there is also restriction on the conduct of pharmaceutical sales agents which has added pressure for the transformation of the sales model of pharmaceuticals.

The group believes that its focus on R&D and innovation will help it to gain market share. Moving forward, the group intends to continue to focus on developing specialized medicines where its strengths lie so as to build up its brand in specialist therapeutic areas. This will continue to leverage on its existing medicine series for treating hepatitis and cardio-cerebral diseases.

The group also actively develops oncology medicines, analgesic medicines, orthopedic medicines, digestive system medicines, anti-infectious medicines, respiratory system medicines, parenteral nutritious medicines and diabetic medicines, etc.

For 9M18, its R&D expenditure amounted to RMB1,702.51m or 10.8% of revenue.

Maintain FV of HK$7.55

With the current reforms in the market, healthcare-related stocks have fallen sharply this year. Based on the MSCI China Healthcare Index [MXCN0HC], the index is down 6.5% this year or down 29.0% from this year’s high.

With the cautious sentiment, we see limited price drivers for the near term. Fair value estimate for the stock remains the same at HK$7.55.

Source: OCBC Research - 23 Nov 2018