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周霖小姐 ( Eurus Zhou)


Graduated from Hong Kong Polytechnic University, Master of Finance (Investment Management). Possess bachelor degree majoring in Financial Management from Southwestern University of Finance and Economics. Focus on industry prospect and corporate fundamentals to explore investment value and cover pharmaceutical and TMT industry.

Phone: 22776515  

CSPC Pharmaceutical (1093.HK) - Some drugs may face price-cut risks while current valuation is attractive enough

Thursday, January 17, 2019 Views626
CSPC Pharmaceutical(1093)
Recommendation on  17 January 2019
Recommendation BUY
Price on Recommendation Date $12.060
Target Price $21.000

Investment Summary

Recently the share price fell to 2017 level, with current PE ratio of 26.5x, which makes the stock attractive, considering CSPC is pharmaceutical leader in HK market. Yesterday, the management stated that in 2019E the group's earnings would increase by 20% to 30%, and the sales of NBP products (恩必普產品) would increase by 25% to 30%. However, as some drugs still have potential price-cut risks in future GPO, we lower 2019 EPS forecast to be HK$0.70, based on 30x target PE, get target price of HK$21.0, and suggest buying during price trough.

Business Overview

2019 growth guidance is announced. The management announced that in 2019E the group's earnings would increase by 20% to 30%, and the sales of NBP products (恩必普產品) would increase by 25% to 30%.

Some products face price-cut risks. We have noticed that in the pilot cities, CSPC abandoned the bid because of the low price in the second round of price negotiations. We thus estimate that CSPC may be barely affected GPO and rapid earnings growth may go on. However, Ou Lai-Ning appeared in the GPO negotiation list in Guangzhou, so we still highlight that there may be potential price-cut risks in future. Therefore, we lowered the revenue forecast of Oulaining and mildly increased the expense ratio to reflect the potential increase in the overall sales expenses.

18Q3 growth slowed down. In the first three quarters, the company recorded sales revenue of HK$15.85bn, up by 41.4% yoy (18H1 41.4%), and profit attributable to shareholders was approximately HK$2.73bn, up 33.8% yoy (18H1 41.1%). By business segments, finished drugs remained strong, with sales revenue of HK$12.35bn, an increase of 51.1% yoy. Among them, innovative drugs recorded sales revenue of approximately HK$7.543bn, up 62.1% yoy; generic drugs recorded sales revenue of HK$4.811bn, up 36.6% yoy. On API business, the average selling price of vitamin C remained at a high level, but due to recovering market production capacity and supply, ASP began to fall in the third quarter. The total supply and demand in the antibiotic market is roughly balanced.

Acquired R&D companies and product rights to enhance R&D pipelines. In Jan, one subsidiary, Ouyi, will receive the exclusive development and commercialization rights of Hangzhou Yingchuang to license small molecule products in China and US. CSPC will pay an exclusive license fee of RMB25mn as a down payment and development milestone payments of RMB200mn, and to pay sales royalties based on sales amount. Five innovative oncology small-molecule drug candidates are attained. In addition, the company acquired 100% equity of Yongshun Technology Development Ltd. at a consideration of RMB252.88 mn. Yongshun is mainly engaged in R&D of innovative monoclonal antibodies for targeting tumor antigens and immunotherapy of various kinds of cancers. At present, these three products have received IND approvals from NMPA. The acquisition will help enrich the CSPC's pipeline in the field of biopharmaceuticals and strengthen overall R&D capabilities.

Valuation & Risks

We give 2019 target price of HK$21.0. Current PE is about 26.5x. Considering that CSPC is a leader in Hong Kong stock market, we highlight that the current price is attractive. 19E EPS is forecasted to be HK$0.70, based on a target PE of 30x, and the target price is HK$21.0.

Risks include: risk of drug development failure; sales expansion is less than expected; costs are rising.Figure: 18H1 results by segments


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