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CSPC PHARMA (1093 HK) 1Q18 Summary

Core Content

CSPC PHARMA reported strong performance in 1Q18, with revenue and adjusted net profit growing by 55% and 43% YoY respectively. Management expressed confidence in achieving over 30% NP growth for the full year of 2018, which is higher than the previous guidance of 20-30% growth. This growth was driven by the expansion of its innovative portfolio, including products like NBP, Duomeisu, and Jinyouli, which saw significant year-over-year increases in sales. Additionally, the company received two Bioequivalence (BE) approvals for Azithromycin and Tramadol, supporting its common generic portfolio.

The company also announced its intention to acquire some PD-1/PD-L1 assets, indicating a strategic focus on expanding its innovative pipeline. The target price (TP) was upgraded to HK$26.4, reflecting a greater M&A premium applied to its SOTP valuation (from 30% to 40%).

Main Points

• Revenue Growth: Revenue for 1Q18 grew by 55% YoY, with a 39% growth expected for 2018 and 20% for 2019.
• Net Profit Growth: Adjusted net profit grew by 43% YoY, with an expected 35% growth for 2018 and 24% for 2019.
• EPS Growth: EPS for 1Q18 was HK$0.61, with an expected growth of 3% and 4% for 2018 and 2019 respectively.
• Valuation: The TP was upgraded to HK$26.4, reflecting a more optimistic outlook on the company's M&A potential and growth prospects.
• Innovative Portfolio: The company's innovative drugs, such as NBP, Duomeisu, and Jinyouli, continued to grow rapidly, supported by regulatory tailwinds and sales restructuring.
• Common Generic Portfolio: Strong growth in common generics was attributed to the two-invoice reform and academic promotion strategies.
• M&A Strategy: CSPC PHARMA is actively seeking to acquire I/O and biosimilar assets, with a potential deal involving the ex-China rights of certain products in exchange for PD-1's China rights.
• Catalysts for 2018: Additional approvals for Metformin and Clopidogrel, along with 3-5 BE approvals and 5 US ANDA approvals, are expected to drive further growth.

Key Financials

Revenue (HKD mn)

• 2015: 11,394
• 2016: 12,369
• 2017: 15,463
• 2018E: 21,489
• 2019E: 25,718

Net Profit (HKD mn)

• 2015: 1,674
• 2016: 2,101
• 2017: 2,771
• 2018E: 3,749
• 2019E: 4,646

EPS (HKD)

• 2015: 0.28
• 2016: 0.35
• 2017: 0.45
• 2018E: 0.61
• 2019E: 0.76

P/E (x)

• 2015: 88.1
• 2016: 70.7
• 2017: 54.4
• 2018E: 40.6
• 2019E: 32.8

P/B (x)

• 2015: 16.9
• 2016: 14.7
• 2017: 9.9
• 2018E: 8.5
• 2019E: 7.3

Dividend Yield (%)

• 2015: 0.4
• 2016: 0.5
• 2017: 0.6
• 2018E: 0.8
• 2019E: 1.0

Valuation Highlights

• Core Portfolio NPV: HKD 81,248 million
• Pipeline NPV: HKD 7,418 million
• Common Generic Portfolio (20x 19 NOPAT): HKD 20,748 million
• API (13x 2018 NOPAT): HKD 8,242 million
• Net Cash: HKD 5,544 million
• Total Valuation: HKD 115,781 million
• Valuation per Share: HKD 18.83

Financial Ratios

Shareholding Structure

• Management: 29.7%
• Free Float: 70.3%

Market Performance

• 1093 HK: 12-month return potential of +8% (from HK$22.9 to HK$26.4)
• HSI: 12-month return of 22.2%
• 1m: 28.6%
• 6m: 67.8%
• 12m: 125.3%

Investment Ratings

• Industry Rating: OVERWEIGHT
• Company Rating: BUY

Analyst and Regulatory Disclosures

• The report is prepared by China Merchants Securities (HK) Co., Ltd. (CMS HK), a licensed corporation.
• The analysts certify that the views expressed in the report reflect their personal opinions.
• The report is for information purposes only and should not be construed as investment advice.
• The content is subject to change and is not guaranteed to be accurate or complete.
• CMS HK is not registered as a broker-dealer in the United States and its products are not available to U.S. persons except as permitted under SEC Rule 15a-6.
• The document is directed only at "Relevant Persons" as defined by UK legislation and is not for public distribution.