20160420-招商证券_香港_-兴科蓉医药-06833.HK-Emerging_MPCM_contender_in_the_booming_plasma_industry_64页_1mb

Sinco Pharmaceuticals Investment Summary

Core Content

Sinco Pharmaceuticals is a leading player in China's pharmaceutical market, specifically in the Marketing, Promotion and Channel Management (MPCM) services industry. As of 2014, it was the third-largest MPCM provider in terms of revenue, and the sole provider of imported plasma-based products. The company has a strong position in the human albumin market, holding a 7.3% market share in China and contributing over 61% of its total revenue in FY15. Sinco's business model is asset-light, focusing on promoting and selling products from overseas suppliers, which allows it to secure longer contracts and exclusive rights.

Main Points

• Market Position:

  • Third-largest MPCM provider in China's pharmaceutical market (2014).
  • Sole provider of imported plasma-based products.
  • Fourth-largest human albumin provider in China with a 7.3% market share (2014).

• Business Strategy:

  • Targets small/medium overseas suppliers that lack in-house marketing capabilities in China.
  • Leverages relationships with major pharmaceutical companies like Kelun to expand its distribution network and improve inventory management.
  • Focuses on expanding its product portfolio with imported plasma-based products and those in fast-growing therapeutic areas.

• Growth Prospects:

  • Expected revenue growth of 29% in FY16E-18E, driven by volume ramp-up and better product mix.
  • Adjusted net profit is projected to be RMB140mn/191mn/245mn (CAGR of 32%) due to top-line growth, better margins, improved efficiency, and lower tax rates.
  • Factor VIII, a recombinant product, is seen as a potential game-changer, especially if Sinco can access this market.

• Valuation:

  • Target price (TP) is HK$1.08, derived from an average of DCF and P/E methods.
  • DCF method suggests a TP of HK$1.11, while P/E method suggests HK$1.05.
  • Implied FY16E P/E of 10.6x.
  • Valuation is compared to peers, with P/E ranging from 10.3x to 15.0x.

Key Information

• Revenue Breakdown:

  • Human albumin contributes a significant portion of revenue, with a decreasing share over time due to growth in other segments.
  • Antibiotics and other drugs are also part of the revenue mix, with some products experiencing sharp growth in early years and stabilization in later periods.

• Market Trends:

  • The MPCM industry in China is expected to grow at a CAGR of ~25% from 2015 to 2019.
  • Human albumin is under-supplied in China, with limited use outside urgent care, unlike in the U.S.
  • The market for plasma-based products is subject to government regulations, including cold-chain requirements and import restrictions.

• Risks:

  • Supplier Bargaining Power: May diminish as overseas manufacturers establish in-house teams in China.
  • Policy Headwinds: Government regulations on plasma products and antibiotics could impact growth and margins.
  • Margin Shrinkage: Price erosion from tendering and regulatory changes could affect profitability.
  • Concentration Risk: High reliance on key suppliers, customers, and products.
  • New Product Uncertainty: M&A and in-licensing are critical for future growth, but success is not guaranteed.
  • Currency Risk: Exposure to USD and EUR due to international sourcing.
  • Limited Operating History: Founded in 2011, with only 5 years of operations, which may affect investor confidence.

Financial Highlights

• Revenue Growth:

  • FY16E-18E revenue growth is projected at 28.7% to 22.2%.
  • Human albumin (10g) revenue is expected to stabilize after initial growth.
  • Antibiotics revenue experienced a sharp decline in 2014 but is expected to grow at a moderate rate.

• Profitability:

  • Adjusted net profit is projected to increase from RMB140mn in FY16E to RMB245mn in FY18E.
  • The growth is attributed to top-line expansion, improved margins, and operational efficiency.

• Valuation Methodologies:

  • DCF Valuation: Implies a TP of HK$1.11 with a 2016E P/E of 10.8x.
  • P/E Valuation: Uses adjusted A-share and Hong Kong-listed peers to determine TP of HK$1.08 with a 2016E P/E of 10.6x.

Peers Comparison

• Sinco is compared to several major pharmaceutical companies in China, including:
  • China Medical System (867 HK)
  • China Biologic Products (CBPO US)
  • Huadong Medicine (000963 CH)
  • Pacific Biopharmaceutical (Pacific Bio)
• The valuation of Sinco is considered attractive compared to its peers, but its limited scale and operating history may affect its perceived value.

Conclusion

Sinco Pharmaceuticals is a strong contender in the MPCM industry, with a unique position in the plasma-based products market. Its growth is driven by strategic partnerships with overseas suppliers and a focus on expanding its product portfolio. However, the company faces several risks, including policy changes, supplier dependency, and currency fluctuations. Despite these challenges, the valuation appears attractive, especially given its potential to expand into new therapeutic areas like Factor VIII. The company is well-positioned for future growth but needs to build credibility and demonstrate consistent performance to justify its valuation.