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CSPC Pharmaceutical Group [1093.HK]

BUY

(unchanged)

Close: HK$16.98 (Nov 1, 2018)

Target Price: HK$22.35 (+31.6%)

Price Performance

Market Cap US$13,490m

Shares Outstanding 5,911.0m

Auditor Deloitte

Free Float 70.0%

52W range HK$12.14-26.05

3M average daily T/O US$109.5

Major Shareholding Mr. Cai Dongchen and

management (30.0%)

Sources: Company, Bloomberg

Harry He—Analyst

(852) 3698-6320

harryhe@chinastock.com.hk

Wong Chi Man, CFA—Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

China Healthcare Sector

We visited CSPC’s NBP production plant and its central R&D centre in Shijiazhuang recently. We believe NBP is on track to deliver >40% revenue growth in Q3 2018. Overall, in the next 2-3 years, we believe CSPC has relative high earnings visibility, driven by 1) its existing portfolio of innovative drugs, especially NBP and oncology drugs; 2) a rapid ramp-up in Albumin Paclitaxel (for breast cancer); and 3) an R&D pipeline with several robust generic candidates expected by 1H2019 and two innovative drugs, COPIKTRA and DPP-4 DBPR108, expected to come out in the next two years. We maintain our BUY rating and earning projections. We keep our Target Price at HK$22.35 (27x 2019E PER, one standard deviation above its historical 5-year average, Figure 2). CSPC’s share price has corrected by 36% since early June’s peak. Now the Company is trading at a histori-cal average TTM of ~23.3x (Figure 2), which is undemanding, given its expected 32.4% EPS CAGR in 2017-2020E. We see initial signs of stabilization for the share price, as it has rebounded by 12% since mid-October. Solid Q3 results (to be announced on November 19, with net profit expected to maintain >30% growth) should be a near-term catalyst.

Investment thesis

NBP plant visit: The Shijiazhuang NBP plant is at full capacity now for ~HK$5bn in NBP sales (vs. our projected NBP 2018E total revenue of HK$5.1bn). This implies NBP needs new capacity to support future growth. According to the plant manager, the new NBP plant will commence produc-tion in 1H2019 and will double NBP capacity to ~HK$10bn in value, i.e. fulfilling next three years’ projected production requirements. Furthermore, NBP shipments and channel inventory remain healthy, so we expect NBP to continue its solid growth momentum in Q3 2018. Overall, we expect NBP to deliver ~43% YoY top-line growth in 2018E (+42.6% YoY in 1H2018).

Visit to CSPC’s Central Institute of Pharmaceutical Research: We visited CSPC’s Central Insti-tute of Pharmaceutical Research in Shijiazhuang. Following are the key takeaways:

Innovative - COPIKTRA (licensed from Verastem for leukemia) is under final human race trial.

Innovative - CSPC DPP-4 inhibitor DBPR108 is currently under phase II clinical trial. Manage-

ment expects phase II to be completed by 2018 and for phase III to commence in 2019. CSPC plans to apply for a launch permit in ~2020, with a launch target in ~2021. DPP-4 is currently second-tier treatment for type II diabetes, but for patients who fail to control blood glucose via metformin hydrochloride, DPP-4 is recommended;

Generic – The Company has applied for production approval for Bortezomib (used for multiple

myeloma) and expects to launch it in 2H2019. The slower-than-expected progress (originally expected by end-2018) is due to the need for CSPC to resubmit supplementary files on its Bortezomib production capacity. We hold a relative conservative view on prospects for CSPC’s Bortezomib, since it should not be among the top three that pass the generics consistency and evaluation (Hansoh Pharm, SinoBio Pharm (1177.hk) and Qilu Pharm).

Generic - Dronedarone Hydrochloride (used for antiarrhythmic, similar to amiodarone in mo-

lecular structure): CSPC’s Dronedarone is at the final production line check stage and produc-tion approval is expected by end-2018. It is expected to be the first generic for Sanofi’s Multaq.

Generic – The Metformin hydrochloride extended release tablet (used for type II diabetes) is

expected to get production approval in 1H2019.

Generic – The Clopidogrel hydrochloride tablet (used for antithrombosis) is expected to get

production approval by 1H2019. We expect CSPC’s Clopidogrel to gain market share from Salubaris’s (002294.SZ) Taijia and Sanofi’s Plavix because of CSPC’s strong marketing capa-bility.

Generic - Pramipexole (used for Parkinson’s disease) and Ticagrelor (used for coronary syn-

drome) are expected to be launched in 1H2019. The final supplementary documents have been submitted for Sunitinib (belongs to rTKI, used for oncology, CSPC applied for gastric cancer indication), and it is expected to be marketed in 1H2019.

For R&D expenses (booked in “other expense” in P&L), management reiterated its guidance of

~HK$1.5bn in 2018E. 2019E R&D expenses should continue to remain high for generics con-sistency and evaluation. R&D expenses are expected to fall in 2020E.

Shijiazhuang plant visit takeaways; Valuation back to historical average

Nov 02, 2018

Source: CGIS Research estimate

Y/E Dec 31 2016 2017 2018E 2019E 2020E

Turnover (HK$ m) 12,369 15,463 21,319 27,195 32,736

Core net profit (HK$ m) 2,101 2,771 3,793 5,024 6,443

Core net margin (%) 17.0 17.9 17.8 18.5 19.7

Core EPS (HK$) 0.352 0.458 0.626 0.830 1.064

YoY change 24.1 29.8 36.9 32.4 28.2

PER (x) 48.2 37.1 27.1 20.5 16.0

PBR (x) 10.0 6.6 5.5 4.6 3.8

ROE(%) 20.8 18.1 20.8 22.9 24.1

EV/EBITDA (x) 30.5 23.0 17.1 12.9 9.9

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Key financials

Source: Company data, CGIS Research estimates

B alance Sheet P ro f it and Lo ss

A s at D ec 31 Year ended D ec 31

(H K$ m) (H K$ m)

Cash & cash equivalents 3,238 6,557 6,801 8,354 11,186 Innovative drugs 4,774 6,582 10,603 15,396 19,926

Inventories 1,933 2,901 3,470 4,127 4,887 Generics 4,193 4,793 6,471 7,441 8,334

Accounts receivable 1,835 2,334 3,338 4,199 5,019 Bulk medicines 3,402 4,088 4,245 4,359 4,476

Others 1,422 1,842 2,778 3,483 4,094 R evenue 12,369 15,463 21,319 27,195 32,736

C urrent assets 8,428 13,635 16,387 20,163 25,186 Cost o f goods so ld (6,060) (6,117) (7,383) (8,780) (10,399)

Property, plant and equipment 5,415 6,663 7,455 8,248 8,564 Gro ss pro f it 6,309 9,346 13,936 18,415 22,338

Intangible assets 79 103 106 91 57 Other gains / (losses) 107 120 90 0 0

Others 838 1,142 1,152 1,164 1,239 M arketing expenses (2,788) (4,375) (6,865) (9,518) (11,621)

N o n-current assets 6,333 7,908 8,714 9,503 9,861 Admin expenses (554) (682) (810) (1,061) (1,244)

R&D and other expenses (424) (928) (1,556) (1,500) (1,350)

T o tal assets 14,760 21,543 25,101 29,666 35,047 Operat ing pro f it 2,649 3,482 4,795 6,336 8,122

Net interest income / (expense) (42) (27) (44) (44) (54)

Accounts payable 2,938 4,513 4,733 5,406 5,658 Share of results o f JV & associates 28 10 25 28 30

ST borrowings 898 927 769 774 942 Non-operating items 0 0 0 0 0

Others 249 319 646 736 814 Pretax income 2,635 3,465 4,776 6,320 8,099

C urrent liabilit ies 4,085 5,760 6,148 6,915 7,414 Income taxes (522) (685) (955) (1,264) (1,620)

Non-contro lling interests 12 10 28 32 36

Long-term debts 240 60 330 332 404 N et pro f it 2 ,101 2,771 3,793 5,024 6,443

Others 244 316 316 316 316 C o re net pro f it 2 ,101 2,771 3,793 5,024 6,443

Lo ng-term liabilit ies 484 375 645 647 719

EBITDA 3,233 4,195 5,647 7,345 9,280

T o tal liabilit ies 4,569 6,135 6,793 7,563 8,133

EPS (HK$) 0.352 0.458 0.626 0.830 1.064

Shareholders' equity 10,108 15,322 18,195 21,958 26,732 C o re EP S (H K$ ) 0.352 0.458 0.626 0.830 1.064

M inority interests 84 85 113 145 181 DPS (HK$) 0.120 0.156 0.213 0.282 0.362

T o tal equity 10,191 15,407 18,308 22,103 26,913

C ash F lo w Key R at io s

Year ended D ec 31 Year ended D ec 31 2016A 2017A 2018E 2019E 2020E

(H K$ m) Gro wth (% Yo Y)

Profit before tax 2,635 3,465 4,776 6,320 8,099 Sales 8.6 25.0 37.9 27.6 20.4

Depr & amortization 510 714 852 1,008 1,158 Operating profit 22.3 31.4 37.7 32.1 28.2

Change in working cap. 110 (1,487) (1,962) (1,459) (1,861) EBITDA 21.3 16.6 29.8 34.6 30.1

Income tax paid (479) (685) (955) (1,264) (1,620) Core net profit 25.2 31.9 36.9 32.4 28.3

Others 140 (44) (57) (70) (73) Core EPS 24.1 29.8 36.9 32.4 28.2

Operat ing cash f lo w 2,916 1,963 2,654 4,535 5,703 P ro f itability (%)

Gross margin 51.0 60.4 65.4 67.7 68.2

Capex (1,106) (1,970) (1,633) (1,771) (1,426) Operating margin 21.4 22.5 22.5 23.3 24.8

Change in other assets (226) 520 32 43 (16) EBITDA margin 26.1 27.1 26.5 27.0 28.3

Investment cash f lo w (1,332) (1,450) (1,601) (1,728) (1,442) Core net profit margin 17.0 17.9 17.8 18.5 19.7

ROA 14.2 12.9 15.1 16.9 18.4

Net change in debt (325) (151) 111 7 241 ROE 20.8 18.1 20.8 22.9 24.1

Others (128) 1,642 (921) (1,260) (1,669) B alance sheet rat io s

F inancing cash f lo w (452) 1,491 (809) (1,254) (1,428) Current ratio (X) 2.1 2.4 2.7 2.9 3.4

Quick ratio (X) 0.8 1.0 1.0 1.1 1.5

N et change in cash 1,132 2,003 244 1,554 2,832 Cash ratio (X) 0.8 1.0 1.0 1.1 1.5

Cash at beginning of the year 2,299 3,235 5,238 5,482 7,035 Trade & bill receivables days 50.1 49.2 45.5 45.6 46.8

Effect from foreign exchange (197) 0 0 0 0 Trade & bill payable days 47.5 44.3 45.2 52.0 44.6

C ash at the end o f the year 3,235 5,238 5,482 7,035 9,868 Inventory turnover days 113.0 144.2 157.5 157.9 158.2

Total debt to equity ratio (%) 11.2 6.4 6.0 5.0 5.0

2016A 2017A

2020E

2020E2019E2018E2020E

2019E

2016A 2017A

2016A 2017E 2018E

2018E 2019E

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Source: Bloomberg

Figure 1: Peer comparison

Source: Bloomberg

Figure 2: Historical 5-year PER band

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8/2013 2/2014 8/2014 2/2015 8/2015 2/2016 8/2016 2/2017 8/2017 2/2018 8/2018

HK$

18.9X

32.3X

27.8X

23.3X

14.4X

Prce Mkt cap

Company Ticker HK$ HK$m 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E

CSPC PHARMACEUTI 1093 16.98 105,927 37.1 27.1 20.5 6.6 5.5 4.6 18.1 20.8 22.9 23.0 17.1 12.9

ESSEX BIO-TECH 1061 5.16 2,984 17.6 13.7 11.3 4.1 3.2 2.6 26.8 25.8 26.3 n.a n.a n.a

FOSUN PHARMA-H 2196 24.05 71,964 16.1 16.9 14.2 2.1 1.9 1.7 13.6 11.4 12.3 25.7 22.0 18.9

SINO BIOPHARM 1177 7.38 93,267 34.6 27.4 22.7 7.0 5.4 4.4 23.9 25.4 24.2 22.6 14.7 11.1

BAIYUNSHAN PH-H 874 29.40 66,175 23.4 12.5 15.1 2.3 1.9 1.8 10.3 16.8 13.5 24.0 19.3 16.2

LUYE PHARMA GROU 2186 6.03 19,748 18.7 13.5 11.3 2.4 2.0 1.7 13.6 16.4 16.7 13.1 11.1 9.3

3SBIO INC 1530 11.70 29,761 30.0 23.3 18.2 3.6 3.2 2.7 12.5 14.6 16.2 20.3 15.5 12.1

LIVZON PHARM-H 1513 23.60 22,001 16.2 13.8 12.0 1.5 1.3 1.2 29.1 9.8 10.4 9.3 8.5 7.4

TONG REN TANG-H 1666 11.20 14,345 19.1 17.3 16.2 2.5 2.0 1.8 13.1 12.2 11.4 n.a n.a n.a

TRAD CHI MED 570 4.96 24,978 16.8 14.2 11.8 1.5 1.4 1.3 9.3 10.3 11.4 12.1 9.3 7.5

CHINA SHINEWAY 2877 9.57 7,914 17.4 11.7 10.0 1.2 1.2 1.1 7.1 9.8 11.2 6.9 4.2 2.9

CONSUN PHARMACEU 1681 5.26 4,603 9.8 8.5 7.4 1.8 1.7 1.5 21.4 23.0 22.7 5.9 5.1 4.0

SIHUAN PHARM 460 1.63 15,438 n.a 9.6 8.8 1.1 1.1 1.0 14.5 12.3 11.9 4.6 6.5 5.8

THE UNITED LABOR 3933 5.35 8,773 24.4 12.9 10.1 1.5 1.4 1.2 6.3 10.1 12.5 7.0 5.6 4.4

LEE'S PHARM 950 5.94 3,517 13.3 12.8 11.4 1.9 1.8 1.6 14.2 14.9 14.4 n.a n.a n.a

Simple average 19.8 14.9 12.9 2.5 2.1 1.8 15.4 15.2 15.4 13.8 11.1 9.1

Median 17.6 13.6 11.6 2.0 1.8 1.7 13.6 13.5 13.0 12.1 9.3 7.5

PER(x) PBR(x) ROE(%) EV/EBITDA (x)

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Figures 3: CSPC Central Institute of Pharmaceutical Research in Shijiazhuang, Hebei, China

Source: CGIS research

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Explanation on Equity Ratings

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BUY share price will increase by >20% within 12 months in absolute terms :

SELL share price will decrease by >20% within 12 months in absolute terms :

HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :