20180914-中国银河国际证券-三生制药-01530.HK-Correction_overdone__Upgrade_to_BUY_5页_737kb

3SBio [1530.HK] Summary

Core Content

3SBio is a biopharmaceutical company that has been upgraded from HOLD to BUY due to a perceived overcorrection in its share price. The upgrade is based on the belief that the company's fundamentals remain strong, and the recent status update for its Trastuzumab bio-similar is a significant near-term catalyst.

Key Information

• Trastuzumab Status: As of September 10, 2018, 3SBio's Trastuzumab application was updated to "under review" by the China Center for Drug Evaluation (CDE), marking a major step towards approval.
• Expected Launch: Trastuzumab is expected to be the first bio-similar to Roche's HERCEPTIN in China, and production approval is anticipated in early 2019.
• Valuation Impact: The Trastuzumab is estimated to be worth HK$1.6 per share via DCF analysis, which is not reflected in the previous PER-based valuation.
• Target Price: Updated to HK$17, up from HK$15.4, representing a 31.8% increase.
• PER Estimates: Target Price corresponds to 32x, 25x, and 21x PER for 2018, 2019, and 2020 respectively.
• Current Trading Position: The stock is trading at approximately 1 standard deviation below its historical average, suggesting undervaluation.
• EPS Growth: Expected to grow at 24.2% CAGR from 2017 to 2020E, with increasing profitability and margin expansion.

Main Points

Trastuzumab Valuation

• Market Potential: Trastuzumab is expected to gain market share due to its lower pricing and effective marketing strategy.
• Valuation Upside: Factors include faster market share gain, higher-than-expected profit margins, and slower competitor launch progress.
• DCF Analysis: Based on assumptions of 10% WACC, 3% terminal growth rate, and a projected market share increase, the DCF valuation suggests a value of HK$1.6 per share.

Market Correction

• Overdone Correction: The share price decline is attributed to the broader healthcare sector correction rather than company-specific issues.
• Biological Drugs Impact: The GPO policy has limited impact on the biological drug business, which is the core of 3SBio's operations.
• Earnings Projections: Current earnings do not include the potential contribution from Trastuzumab, which is expected to start in 2020E.

Financial Highlights

Profitability Metrics

Key Ratios

Investment Thesis

• Positive Catalyst: Trastuzumab's expected launch in early 2019 is a key driver for the stock.
• Valuation Upside: The inclusion of Trastuzumab in the valuation model increases the target price significantly.
• Sector Performance: The company is undervalued relative to its historical average and is expected to outperform in the coming years.
• Competitive Landscape: 3SBio's Trastuzumab is the most promising in China, with competitors like Henlius and Zhejiang Hisun also in the race but with slower progress.

Conclusion

3SBio is viewed as a strong investment opportunity due to its robust fundamentals, promising Trastuzumab product, and undervaluation. The upgrade to BUY reflects confidence in the company's ability to capitalize on the Trastuzumab market and the broader healthcare sector recovery.