Investor Notes - Phillip Securities (HK) Ltd

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15 Jan, 2019 (Tuesday)

XINYI SOLAR(968)
Analysis：
China will start building pilot wind and solar power projects that will not receive national government payments. Subsidy-free plants may be exempt from participating in some power market transactions and will sign long-term power purchase agreements with grids at fixed tariffs. This brings certainty for investment decisions. The solar PV supply chain could be more direct beneficiary and Xinyi Solar (968), being a market leader in the solar glass industry, will stand to benefit. The successful operation of the production line in Malaysia since 2017 enables the Group to develop overseas markets more flexibly and efficiently. To further expand its overseas market share, the Group will continue its expansion of adding three new solar glass production lines with a daily melting capacity of 1000 tonnes each in Malaysia. The first new production line was ready for commercial production at the end of 2018 and the development plan of the second and third new production lines will be adjusted in accordance with market conditions. (I do not hold the above stock)
Strategy：
Buy-in Price: $2.95, Target Price: $3.25, Cut Loss Price: $2.80

PAB(000001.SZ)
Analysis：
In general, we expect that the China domestic interest rates may keep going down but not drop dramatically, considering the limited capital supply in short run. Thus the profitability of bank will be relatively stable in future. Ping An Bank recently announced earnings alert. In 2018, its revenue reached RMB116.716bn, a yoy increase of 10.3%, and net profit increased by 7% to RMB24.818bn. The non-performing loan ratio was 1.75%, up by 0.05 ppts, basically remaining stable. Ping An`s strategy is to strengthen technological power with a “SAT” business model, which fully integrates social, APP and remote service resources to enhance management efficiency and improve customer experience. It will place importance on developing retail bank business and promote the development of credit card, private banking, wealth management and other promising segments.
Strategy：
Buy-in Price: $10.11, Target Price: $12.50, Cut Loss Price: $9.50

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

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

Financials

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Recommendation on 15-1-2019
Recommendation	BUY
Price on Recommendation Date	$ 12.060
Suggested purchase price	N/A
Target Price	$ 21.000

Writer Info

Eurus Zhou
(Research Analyst)

Tel: +852 2277 6515

Email:
euruszhou@phillip.com.hk

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