Investment Summary

CSPC announced 18H1 results last week with strong revenue and profit growth. We maintain EPS forecast of HK$0.59/0.78 for 18E/19E, and target price of HK$24.8 on the basis of a target P/E ratio 42x. (Closing price at 28 Aug 2018)

Business Overview

Financial review. Total sales increased by 49.8% yoy to HK$10.79bn in the first half, mainly due to the sustained strong growth of innovative drugs (now 45.2% of the total revenue), and recovery of Vitamin C business which also drive the profitability of this business up. The profit attributable to shareholders increased by 41.1% yoy to HK$1.85bn. Cash flows from operating activities climbed to HK$2.18bn (HK$1.27bn in 2017). Operation efficiency improves. Average turnover period of accounts receivable increased slightly from 40 days to 37 day, and inventory days dropped from 173 days to 150 days.

Escalated expenses. OPM dropped by 1.8pp due to rising selling and R&D expenses. R&D expenditure rose 112% yoy to HK$688mn, more than 60% of which was spent on innovative drug R&D, and some on conformity assessment and generics. In the next few years, CSPC will continue to invest heavily in innovative drugs thus we expect that R&D cost is expected to remain relatively high. Selling expenditure ratio rose to 33.35% in 18H1 from 25.8% in 17H1, mainly resulting from continued expansion of sales team and increased cost of academic promotion. According to company guidelines, the number of salesmen for NBP will increase to about 1500 by FY17 end, and that for Xuanning and Olaining will reach more than 600 respectively. Also CSPC proactively promotes the consistency evaluation of generic drugs. At present, products that have passed consistency evaluation include azithromycin tablets, tramadol hydrochloride tablets and captopril tablets, etc.

Innovative medicines. Innovative drugs achieved HK$48.7 in 18H1, up by 65% yoy. By products, NBP achieved sales revenue growth of 42.6% to HK$2.36bn, with 28% growth for capsules and 57.5% for injections. Albumin paclitaxel has come into market since Mar, which grows quickly realizing sales of HK$86mn yet. Albumin paclitaxel has now entered five provinces’ drug reimbursement list and covers 290 hospitals. Sales target according to Mgt was HK$300mn/1bn for 18E/19E. Revenue of Oulaining increased by 78% to HK$1bn, and that of Xuanning injections increased by 105% to HK$580mn.

Generic medicines. Sales of generic drugs reached HK$3.31bn, a notable increase of 42.3%, mainly because the company continues to intensify promotion of non-antibiotic drugs and expand oral products for chronic diseases. High-end antibiotic products (Meropenem for injection) and health products (vitamin C buccal tablets) also maintained rapid growth. The company indicated that it would consider divestiture or sale of VC business. Currently, VC business provides stable cash flow for the group, and has higher than industry average profit margin. While its gross margin will further increase, if the divestiture of Vitamin C business happens.

Valuation Thesis & Risks

We maintain target price at HK$24.8. Solid 18H1 results further prove its growth momentum that coming from expanding salesman team and newly-launched drugs. We remain TP of HK$24.8 to factor into concerns about improving expenditures (for sales and R&D). Risks include: R&D failure; Slow than expected sales growth; Rising expenses.

Financials

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