20150728-中国银河国际证券-INITIATE_COVERAGE__Strong_and_sustainable_growth_from_R_D_22页_2mb

Summary of CSPC Pharmaceutical Group [1093.HK]

Core Content

CSPC Pharmaceutical Group [1093.HK] has transitioned from a low-end generics and bulk medicines manufacturer to a leading innovative drug manufacturer in China through the acquisition of three drug companies from its parent. The company is now positioned to achieve strong and sustainable growth, driven by its robust R&D efforts and promising product pipeline.

Main Points

• Growth Strategy: CSPC has shifted its focus to innovative drugs, particularly in the areas of cardio-cerebrovascular (CCV), neurology, and oncology. This shift is expected to significantly improve its gross margin and core net profit growth.
• Innovative Drugs Portfolio:
  • NBP (恩必普): A patented CCV drug used for treating ischemic stroke, which has a strong growth trajectory and is expected to reach US$1bn in revenue by 2023.
  • Oulaining (歐來寧): A neurology drug with an exclusive injection form, contributing to strong growth with a CAGR of 76.1% between 2010 and 2014.
  • Xuanning (玄寧): A CCV drug for hypertension, with a target growth of over 20% in 2015.
  • Duomeisu (多美素): A liposomal doxorubicin used in oncology, accounting for over 50% of oncology revenue in 2014 and expected to grow significantly.
  • Jinyouli (金友力): The first long-acting growth factor drug in China for chemotherapy-related leucopenia and infection prevention.
  • Ailineng (艾林能): An elemene injection for cancer treatment, included in the National Reimbursement Drug List.
  • Nuolining (诺林宁): A newly launched imatinib mesylate tablet for leukemia treatment, with a price discount of over 50% compared to the original drug.
• R&D Pipeline: CSPC has a large R&D pipeline with 170 drugs under development, including 14 Class 1 new drugs and 46 Class 3 new drugs. The company expects to launch four to five Class 3 new drugs in 2015, contributing to future growth.
• Financial Outlook:
  • Core net profit is forecasted to grow at a CAGR of 31.8% from 2014 to 2017.
  • Gross margin is expected to improve from 38.2% in 2014 to 41.6% in 2015E and 44.5% in 2016E.
  • The company targets a price target of HK$8.82, implying a PER of 30.4x for 2015E and 23.8x for 2016E, which is a premium to peers.
• Market Potential:
  • The stroke market in China is expected to grow significantly, reaching RMB69bn by 2020.
  • The oncology drugs market is driven by increasing medical coverage and new, more effective drugs.
  • The hypertension market is large, with 266m adults in China affected, and CSPC's Xuanning is expected to grow by over 20% in 2015.
• Generics and Bulk Medicines:
  • Generics account for 36% of total revenue and are expected to see margin improvement through product mix optimization and price ceiling removal.
  • Bulk medicines, which still account for 39% of total revenue, are considered a "white elephant" due to stagnant growth and limited upside potential.

Key Financials (2013A–2017E)

Investment Recommendation

• Recommendation: BUY
• Price Target: HK$8.82
• Target Price Justification: Based on a DCF model with a WACC of 10.1% and a terminal growth rate of 4%.

Conclusion

CSPC Pharmaceutical Group is well-positioned for future growth due to its strong R&D capabilities, promising product pipeline, and strategic shift towards innovative drugs. While the generics and bulk medicines segments may not offer significant growth, the company's focus on high-margin innovative drugs and product mix optimization is expected to drive sustainable profitability and margin improvement. The company's leadership in key therapeutic areas such as stroke and oncology further enhances its growth potential.