Investment Summary

During the last month, the stock price has dropped by ~17%, after which we see Accumulate opportunity. The management maintains annual NP growth guidance of 20-30% intact for future 5 years. We highlight that CSPC as a leading firm among HK listing peers has solid fundamentals and maintain 18E/19E EPS estimation of HKD0.59/0.78 and target price HKD24.8, implying forward PE 36.8x. (Closing price at 5 Jul 2018)

Business Overview

Solid 18Q1 results. The company reported 18Q1 topline growth of 55% (HKD5.39bn) and lower operating income growth of 41%. This is due to rising selling expenses and increasing R&D investment, which led operating margin dropped by 2ppts. While net profit maintains proportionated growth of 42%. We expect the company to achieve good results in first half.

Finished drugs beat our expectations, given notable YoY growth of 58.5%. Innovative drugs (60% in segment income) recorded 66% growth while common generic drugs reported 49% growth. In future, the company will continue to enlarge sales team of innovative drugs, explore blank markets and strengthen academic promotion. On generic drugs, the company targets continuously stable growth through introducing TCM products and pediatric drugs, to build branded generic drugs.Bulk drugs. VC continues to benefit from relatively high price since last year, given Q1 sales was up by 112% which simultaneously contributed to profitability. Antibiotics reported moderate growth of 24% resulting from recovering price. However caffeine generated less profit attributable to rising costs.

Focusing on biotech targets. The company can externally expand through acquiring biotech targets to enrich product mix. Back to the beginning of 2018, CSPC announced acquisition of ~40% interest of a biotech firm. In future, it is expected to seek target firms with relatively mature pipeline of biologic drug products.

Valuation Thesis & Risks

Our model derive TP of HKD24.8: Given recently intensifying short-term volatility, we highlight Accumulate opportunity for medium-term investment. Robust Q1 results enhance our confidence towards 2018 performance, but concerns of rising selling costs and R&D expenses lead to unchanged 18E/19E EPS estimation of HKD0.59/0.78 and target price of HKD24.8, with target PE 42x. Risks include: rising selling and R&D expenditure; M&A or R&D fail expectations; policy risks.

Financials

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