• Strong set of 1Q results
• Guiding for same 20-30% growth
• Maintain FV of HK$14.81

Innovative Drugs Rose 54%

CSPC Pharmaceutical Group [1093 HK] posted 1Q19 net earnings of RMB952m, up 28.7% YoY. Revenue grew 25.6% to RMB5493m. Finished Drugs generated strong double-digit revenue growth of 33.7% to RMB4245m which accounted for 77% of total group revenue. Bulk Drugs saw a 4.1% rise in revenue to RMB1248m and accounted for the remaining 23% of group revenue.

Gross profit margin improved from 64.3% in 1Q18 to 69.9% in 1Q19. Operating profit margin also improved from 27.0% to 29.4%. With substantially higher Research & Development (R&D) expenses this quarter, up 77% YoY to RMB461m, pretax profit margin was flat at 21.1%. Its Innovative Drugs did well, generating revenue growth of 54.4% to RMB2954m.

As the group’s operation is mainly in China, with transactions mainly in RMB, the group has decided to present the financial statements in RMB with effect from 1 Jan 2019.

Management Is Still Optimistic

Management is still fairly positive about its outlook and is retaining its guidance of 20-30% growth. Its key innovative drug, NBP (butylphthalide soft capsules and injections), is expected to continue to enjoy strong growth momentum, largely from the increase in its sales force from 1500 to 1800. However, the Vitamin C market remains challenging and prices are expected to ease.

Profit margin for Vitamin C has dropped from an estimated 38.4% in 1Q18 to 31.6% in 1Q19. Of its business segments, only Finished Drugs (which included Innovative Drugs) reported improved margin from 19.6% in 1Q18 to 21.5% in 1Q19. Management has also guided for full year R&D expenses of RMB1.7-1.8b.

In Line Results; No Change to FV

As its 1Q19 results are fairly in line with our full year expectations, we are maintaining our earnings projections. With the uncertainty on the global front over the current trade situation, there will be a near term cap on its share price performance. We are maintaining our fair value estimate of HK$14.81.

Source: OCBC Research - 22 May 2019