20170612-招商证券_香港_-华润医药-03320.HK-Quality_A-share_pharma_proxy_now_more_catalysts_on_its_own_later_11页_1mb_1mb

CR Pharm (3320 HK) Summary

Core Content

CR Pharm (3320 HK) is a Hong Kong-listed pharmaceutical company that is viewed as an inexpensive proxy to the positive momentum of its A-share subsidiaries. The report highlights its potential for growth through both its subsidiaries and its own initiatives, such as M&A and R&D collaborations.

Main Points

• Tactical View: CR Pharm is currently trading at a 14x 2018E P/E ratio, which is a 36% discount to its A-share distributors. It is considered a favorable way to play the momentum in high-quality A-share pharma stocks.
• Fundamental View: The company has the potential to be valued higher than the sum of its parts if it successfully executes on distribution growth, R&D collaboration, and value-accretive M&A.
• Target Price and EPS: The report maintains a "BUY" rating with a new target price of HK$10.3, which is an increase of 12% from the previous price of HK$9.18. The expected EPS growth is +5% in 2017 and +2% in 2018.
• Subsidiaries Performance: The three A-share subsidiaries - Dong-E-Ejiao, CR Sanjiu, and CR Double Crane - have shown robust earnings growth in 1Q 2017, with earnings growth ranging from 12% to 45%. These subsidiaries are expected to contribute around 60% of the Group's 2016 adjusted net profit.
• Catalysts: The report identifies several potential catalysts for CR Pharm, including the expansion of the two-invoice system, collaborative R&D initiatives with Fujifilm, and the management of its balance sheet through ABS and M&A.
• Valuation: The current price of CR Pharm is 20% below the SOTP valuation, which is based on the market value of its subsidiaries. The TP of HK$10.3 is based on a 16x 2018E P/E ratio, which is aligned with the sector average for 2017E.

Key Information

• Earnings and Growth: The company's reported net profit is expected to grow by 23.9% in FY17E and 15.7% in FY18E. The top-line growth is expected to be 11% for both years.
• Dividend Yield: The DPS is expected to increase from HK$0.09 in 2016 to HK$0.13 in 2018.
• ROE: The ROE is expected to increase from 9.4% in 2016 to 10.3% in 2018.
• P/B Ratio: The P/B ratio is expected to decrease from 1.5 in 2016 to 1.2 in 2018.
• Market Cap: The market cap of CR Pharm is HK$57,692 million.
• Free Float: The free float is 34.5%.
• Shareholding Structure:
  • China Resources National Corporation: 53.0%
  • Beijing Pharmaceutical Investment Ltd: 17.7%
  • Hengjian Intl Investment: 4.6%

Additional Catalysts

• Two-invoice system expansion: The two-invoice system is expected to roll out nationwide in 2H17, which should provide greater growth momentum for CR Pharm's distribution business.
• Collaborative R&D with Fujifilm: CR Pharm and Fujifilm have formed an alliance on biosimilars, regenerative drugs, and TCM. Fujifilm has a strong pharmaceutical franchise, including a Humira-similar pending BLA in the US.
• M&A and Financial Firepower: CR Pharm is expected to become debt-free by 2018 and have HK$69 billion in financial firepower, assuming a 1x target net gearing.

Valuation Comparison

• SOTP Valuation: Based on the market cap of its A-share subsidiaries, CR Pharm is valued at HK$11.3.
• Discount to TP: The current price is 20% below the SOTP valuation, suggesting potential for growth.
• Sector Average: The sector average 2017E P/E ratio is 16x, which aligns with the TP methodology.

Financial Summary

• Revenue Growth: Expected to grow at 10.8% in 2017E and 11.1% in 2018E.
• Net Profit Growth: Expected to grow by 23.9% in 2017E and 15.7% in 2018E.
• EPS Growth: Diluted EPS is expected to grow by 5% in 2017E and 2% in 2018E.
• Balance Sheet: CR Pharm has a strong balance sheet, with cash and ST investments growing from HKD 14,620 million in 2015 to HKD 27,273 million in 2019E. Total assets are expected to grow from HKD 127,149 million in 2015 to HKD 164,075 million in 2019E.

Conclusion

CR Pharm is a promising investment opportunity, with a strong foundation and potential for growth through its subsidiaries and own initiatives. The report recommends maintaining a "BUY" rating with a target price of HK$10.3, based on the company's expected performance and valuation.