20180828-招商证券_香港_-上海医药-02607.HK-Delivering_solid_growth_in_2Q_as_MNC_s_new_drug_approvals_quickened_in_the_summer_5页_994kb

Shanghai Pharma (2607 HK) Summary

Core Content

Shanghai Pharma (2607 HK) is a leading pharmaceutical and healthcare company in Hong Kong, noted for its strong performance and strategic position in the market. The report highlights its solid growth in the second quarter of 2018, driven primarily by its pharmaceutical manufacturing segment, while other segments such as distribution and joint ventures have had a drag on performance. The report also discusses the potential for growth due to favorable regulatory changes in China that are accelerating the approval of new drugs, especially those from multinational corporations (MNCs).

Main Points

• 2Q18 Performance:

  • Revenue and adjusted net profit (Adj. NP) growth accelerated to +21% / 8%, aligning with expectations.
  • Pharma manufacturing continued to be the key growth driver, with 26% revenue growth in 2Q (vs. 31% in 1Q).
  • Distribution revenue declined by 2% excluding Cardinal, due to the two-invoice policy.
  • Group operating margin increased by 0.3pp to 4.2%, mainly due to a sales mix change, but was offset by rising financial expenses.
  • The company obtained two BE approvals and filed the BE result of Metformin ER tablet for approval, among six BE filings in the first half of 2018.

• Regulatory Environment:

  • In June 2018, China approved the first PD-1 inhibitor (Opdivo).
  • In July 2018, the CFDA released a technical guidance to accept overseas clinical data for new drug approval in China.
  • On 28 August 2018, the Chinese government reiterated its commitment to accelerate marketing approvals for overseas drugs, indicating that this initiative is not affected by recent CFDA personnel changes.
  • SH Pharma is the largest agent of MNC drugs in China and has recently signed distribution agreements for Opdivo, Lenvima, and Genvoya.

• Valuation and Outlook:

  • The company's 18/19E estimates and target price (TP) remain unchanged.
  • Valuation based on 15x EV/NOPAT suggests a 13/11x 2018/19 PER, indicating re-rating potential.
  • The company is positioned as a preferred partner of MNC pharma, offering a solid earning acceleration angle and valuation upside in the coming years.

Key Financials (2016–2020E)

Metric	2016	2017	2018E	2019E	2020E
Revenue (RMB mn)	120,765	130,847	157,848	171,964	191,071
Revenue Growth (%)	14.5%	8.3%	20.6%	8.9%	11.1%
Net Profit (RMB mn)	3,064	3,075	3,591	4,528	5,356
Net Profit Growth (%)	15.6%	0.4%	16.8%	26.1%	18.3%
EPS (RMB)	1.14	1.14	1.27	1.59	1.88
DPS (RMB)	0.43	0.46	0.41	0.51	0.60
P/E (x)	15.6	14.6	13.1	10.5	8.8
P/B (x)	1.5	1.3	1.2	1.1	1.0
ROE (%)	8.7%	8.9%	8.3%	9.4%	10.1%

Investment Outlook

• Company Rating: BUY

  • Expectation: The stock is expected to generate 10%+ return over the next 12 months.
  • Target Price (TP): HK$28.1 (up +37% from previous price of HK$20.5).

• Sector Outlook: OVERWEIGHT

  • Expect the pharmaceutical and healthcare sector to outperform the market over the next 12 months.

Financial Ratios (2016–2020E)

Ratio	2016	2017	2018E	2019E	2020E
Revenue Growth (YoY)	14.5%	8.3%	20.6%	8.9%	11.1%
Gross Margin	11.5%	12.4%	13.7%	14.6%	15.1%
Operating Margin	3.4%	3.7%	3.9%	4.3%	4.4%
Adj. Net Profit Margin	2.5%	2.3%	2.3%	2.6%	2.8%
ROE (%)	8.7%	8.9%	8.3%	9.4%	10.1%

Shareholding Structure

• Shanghai SASAC: 33.6%
• Shanghai Guosheng: 1.2%
• Shenergy Group: 0.9%
• Free float: 66.4%

Key Data

• 52-week range (HK$): 18.2–24.55
• Market Cap (HK$ mn): 18,841
• Average Daily Volume (mn): 5.15
• BVPS (HK$): 11.76

Investment Ratings

• Industry Rating: OVERWEIGHT
• Company Rating: BUY

Analysts

• Su Zhang
• Hayden Zhang
• Contact: +85231896357 / +85231896354
• Email: suzhang@cmschina.com.hk / haydenzhang@cmschina.com.hk

Summary of Key Highlights

• SH Pharma's performance in 2Q18 was strong, with pharma manufacturing being the main growth driver.
• Regulatory changes in China are expected to boost the company's performance and valuation in the future.
• The company is well-positioned to benefit from the acceleration of MNC drug approvals.
• Valuation remains at 13/11x 2018/19 PER, suggesting re-rating potential.
• The target price remains unchanged, indicating confidence in the company's future growth.
• Financial metrics show consistent improvement in margins and profitability.
• Investment banking and advisory services are expected to continue as the company expands its operations.

Conclusion

Shanghai Pharma (2607 HK) is a solid investment with strong growth potential in the pharmaceutical and healthcare sector. Its strategic position as a leading distributor of MNC drugs, combined with favorable regulatory changes in China, positions it well for future earnings acceleration and valuation upside. The company's financial performance and market share are positive indicators, and its investment rating of BUY reflects confidence in its 10%+ return potential over the next 12 months.