20171123-招商证券_香港_-华润医药-03320.HK-Greater_visibility_on_KPI_6页_1mb

CR Pharm (3320 HK) Summary

Core Content and Key Information

CR Pharm (3320 HK), a Hong Kong-listed pharmaceutical company, is positioned as a rare "smart beta" proxy to A-share quality OTC, TCM, and generic pharma. The company has a low valuation (16x 2018 PER) and is expected to maintain high growth (19% CAGR in reported earnings over 2017-2018).

The company has introduced a comprehensive KPI-based share option scheme, covering 199 staff members, including directors and senior managers. The scheme limits new shares to 10% of the share base and 1% annually. KPIs for 2018-2019 include meeting EVA targets, achieving an 8.7%-9% annual revenue growth, maintaining an operating margin of 5.5%-5.6%, and ensuring revenue and margin growth are at least at the 75th percentile of peers. The exercise price is set no less than the highest of the closing price on the grant day or the average of the 5 preceding trading days. The vesting period is 5 years, and the scheme is considered more investor-friendly compared to Sinopharm's restricted shares, which were priced at 50% of the spot price and only accounted for 0.3% of the share base.

The company's 3Q performance was in-line with expectations, with Double Crane outperforming and distribution revenue and margins holding up. However, Ejiao's att. NP was slightly below expectations due to marketing expenses, though a 10% price increase in main products is expected to support growth in the coming quarters. Negative operating cash flow persists due to the two-invoice system, but the model was slightly adjusted without significantly impacting EPS.

Valuation and Target Price

The target price (TP) for CR Pharm is set at HK$12.0, based on a SOTP (Sum of the Parts) valuation method. The TP is 19x 2018E PER, which is higher than the current valuation of 16x 2018 PER. This suggests a potential upside of 20% from the current price of HK$10.1.

The valuation methodology was updated from PE multiples to NOPAT-based multiples, considering the impact of external growth on the balance sheet. The SOTP reflects 14x NOPAT for distribution and 15x for pharma, adjusted for net debt and financial assets. CR Pharm's valuation is at a 24% discount to A-share distribution peers and a 13% discount to its SOTP value.

Financial Performance

Revenue and Growth

• 2015-2017E: Revenue grew from HKD 146,568 million to HKD 173,338 million, with a CAGR of 10.6%.
• 2018E: Revenue is expected to reach HKD 190,361 million, a growth of 9.8% YoY.
• 2019E: Revenue is projected at HKD 209,218 million, a growth of 9.9% YoY.

Profitability

• Reported Net Profit: Increased from HKD 2,850 million in 2015 to HKD 3,452 million in 2017, with a CAGR of 22.4%.
• Net Profit (Adjusted): Rose from HKD 1,611 million in 2015 to HKD 3,362 million in 2017, with a CAGR of 34.9%.
• Diluted EPS: Increased from HKD 0.35 in 2015 to HKD 0.63 in 2017, with a CAGR of 5.5%.

Margins

• Gross Margin: Increased from 15.8% in 2015 to 16.0% in 2017.
• Operating Margin: Increased from 6.3% in 2015 to 6.2% in 2017.
• Net Margin: Increased from 1.9% in 2015 to 2.0% in 2017.

Key Financial Ratios

• P/E Ratio: Decreased from 28.9 in 2015 to 15.9 in 2018.
• P/B Ratio: Decreased from 2.1 in 2015 to 1.3 in 2018.
• ROE: Increased from 13.3% in 2015 to 10.5% in 2018.
• Net Debt/Equity: Decreased from 56.7% in 2015 to 21.8% in 2018.
• Current Ratio: Increased from 1.2 in 2015 to 1.5 in 2018.
• Quick Ratio: Increased from 0.9 in 2015 to 1.2 in 2018.

Investment Ratings

• Industry Rating: OVERWEIGHT, indicating the sector is expected to outperform the market over the next 12 months.
• Company Rating: BUY, highlighting CR Pharm's potential for long-term outperformance due to its unique positioning, low valuation, and high growth prospects.

Market Position and Shareholding

• Market Cap: HKD 63,222 million.
• Free Float: 34.5%.
• Shareholding Structure:
  • China Resources National Corporation: 53.0%
  • Beijing Pharmaceutical Investment Ltd: 17.7%
  • Hengjian Intl Investment: 4.6%

Comparative Analysis

• HK Listed Peers:

  • Sinopharm-H (1099 HK): P/E 19.8, P/B 1.7, ROE 9.4.
  • China Medical SY (867 HK): P/E 19.9, P/B 4.4, ROE 23.9.
  • Pioneer PHARM (1345 HK): P/E 2.4, P/B 3.0, ROE 22.5.

• A Share Listed Peers:

  • Jointown Pharma (600998 CH): P/E 38.4, P/B 3.6, ROE 15.4.
  • China Meheco C-A (600056 CH): P/E 27.1, P/B 3.0, ROE 16.7.
  • China National-A (000028 CH): P/E 60.8, P/B 1.8, ROE 15.0.

Conclusion

CR Pharm is a rare "smart beta" proxy in the pharmaceutical sector with a low valuation and strong growth potential. The KPI-based share option scheme is designed to align management incentives with long-term performance. Despite some short-term challenges, the company is expected to outperform its peers, supported by its diversified business model and strategic positioning. The target price of HK$12.0 suggests a 20% upside, making it an attractive investment opportunity.