20180828-中国银河国际证券-国药控股-01099.HK-The_worst_is_over.Maintain_BUY._5页_1mb

SinoPharm [1099.HK] Summary

Core Content and Outlook

SinoPharm (1099.HK) is currently rated BUY by analysts, despite a profit warning for Q1 2018 that indicated a potential 30% YoY drop in net profit. However, the company's 1H2018 results showed only a 3% decline in profit, with a strong recovery in Q2 2018, where net profit increased by ~24% YoY. This suggests that the negative impacts of the "two invoice system" and downstream cost control are diminishing, and management has delivered on its promises.

The outlook for SinoPharm is positive, with expectations of above industry average drug distribution revenue growth in the high single digits for 2018 and beyond. The gross margin is projected to remain high, around 8.7%, driven by direct sales to hospitals, growth in the high-margin medical device distribution business, and increased bargaining power from generics passing the consistency evaluation.

Key Financials

Revenue and Earnings

Profitability and Ratios

Earnings Growth

Key Drivers of Growth

• Gross Margin Improvement: The gross margin improved from 7.9% in 1H2017 to 8.7% in 1H2018 due to more direct sales and growth in the high-margin medical device business.
• Fading Negative Impacts: The negative effects of the "two invoice system" and the zero price mark-up policy are expected to fade gradually in 2018.
• Bargaining Power: With more generics passing the chemical evaluation, SinoPharm is expected to gain stronger bargaining power in tendering processes.
• Growth Engines: The company's retail and medical device distribution businesses are expected to continue driving growth.

Target Price and Valuation

• Target Price: Adjusted from HK$45.9 to HK$43.1, reflecting a 16x 2019E PER, which includes ~5% RMB depreciation.
• Valuation Metrics: The current price-to-earnings (PER) ratio is at 15.9x for 2018E and is expected to decline to 13.7x for 2019E and 11.7x for 2020E.
• Price Performance: The stock closed at HK$36.8 on August 27, 2018, and the 52-week range is HK$30–HK$44.45.

Financial Health

• Liquidity: The current ratio and quick ratio are slightly declining, indicating potential liquidity challenges.
• Inventory and Receivables: Inventory turnover days increased slightly, and trade receivables days increased from 95 to 97, suggesting a slight elongation in the collection period.
• Cash Flow: Operating cash flow is projected to increase, while investment and financing cash flows show mixed trends.

Company Overview

• Market Cap: US$12,972m
• Shares Outstanding (H + Domestic): 2,767m
• Auditor: E&Y
• Free Float (H): 99.7%
• Major Shareholder: CNPGC (56.79%)
• Dividend Payout Ratio: Maintained at ~30% for all periods.

Investment Thesis

• Bottoming Out: The 2018 bottoming-out story remains unchanged, with growth expected to accelerate in 2019 and 2020.
• Positive Outlook: The worst is over, and recovery is on the way, with a more visible outlook for the company.
• Growth Drivers: Continued growth in the retail and medical device distribution sectors, along with improved gross margin and stronger bargaining power from generics.

Peer Comparison

Key Financial Highlights

• Cash & Cash Equivalents: Increased significantly from 2016 to 2018, reaching RMB 49,910m in 2018E.
• Inventories: Slightly increasing, reaching RMB 39,029m in 2020E.
• Trade & Note Receivables: Showed a steady increase, reaching RMB 106,227m in 2020E.
• Total Assets: Expected to increase to RMB 235,164m by 2020E.
• Total Liabilities: Projected to increase, reaching RMB 159,197m in 2020E.
• Shareholders' Equity: Projected to grow to RMB 75,967m in 2020E.

Conclusion

SinoPharm is expected to recover from the negative impacts of the "two invoice system" and the zero price mark-up policy. The company's gross margin is projected to remain strong, and its core earnings are expected to grow steadily. The analysts maintain a BUY rating, indicating confidence in the company's future performance and recovery.