Business Summary:

CSPC Pharma focuses on the manufacturing, researching and marketing of medicines and pharmaceutical related products. The group has three major business segments (consisting of nearly 1,000 finished drugs products) including innovative drugs 创新药, common generic drugs 普药and bulk drugs  原料药.  The manufacturing facilities of CSPC are mainly located in Shijiazhuang City石家庄市, Hebei Province, China.

Innovative drugs are mainly used for the treatment of acute ischemic stroke脑中风,  cardio-cerebrovascular心脑血管, oncology抗肿瘤, digestive system, mild to moderate memory and mental impairment resulting from vascular dementia血管痴呆, senile dementia 老年呆症and brain trauma脑创伤.

Common generic drugs are mainly used for the treatment for anti-inflammatory抗炎, antipyretic analgesic解热镇痛, fever, cold, cough and various types of infection caused by bacteria. Drugs also include traditional Chinese medicine.

Bulk drugs products include antibiotics, vitamin C and caffeine series咖啡因系列.

Business Summary and Prospect:

For the last year as of the end of December, net profit rose 26.2% yearly to HK$2.10 billion versus HK$1.67 billion. Sales revenue increased 8.6% from HK$11.39 billion to HK$12.37 billion. Gross profit rose 20.8% to 6.31 billion, and operating profit before tax increased 24.8% to 2.64 billion. Net finance cost was 28.7 million which decreased by 38.3%. The earnings per share equaled HK$35.25 cents (versus Hk$28.18 cents previously) and a final dividend of HK$12 cents was declared.

UBS report said in China's newly announced National Drug Reimbursement List (NDRL), two of CSPC PHARMA's major drugs- NBP injection 恩必普注射液: 治疗脑中风and Jinyouli (JYL) 津优力: 预防化疗後的白细胞减少– are included; which are slightly better than expected. The inclusion could materially boost the two drugs' revenue growth from 2018. Moreover, CSPC's oncology drug, Duomeisu (DMS)多美素:治疗骨髓肿瘤, could also be included in the coming list for price negotiation. It is expected that its revenue/earnings forecasts will be increased by 3%/8% for 2018 and 5%/12% for 2019. UBS lifted the target price from $9.5 to $11.1, implying 25x 2017 P/E estimate. The stock is still attractive following its strong rally in the past two months, and the broker keeps the rating Buy.

Risk:

a) relatively higher P.E. and P.B. compared with other pharmaceutical industry

b) Factory production is temporarily halted owing to anti-pollution drive (reduce the blanket of smog)

c) poor price negotiation and increasing cost for developing new drugs

d) poor sales performance than expected from Vitamin C

Technical Analysis:

The stock prices hit historic high of $10.7 on 5 Apr, 2017 after the announcement of final year-end result. It is suggested to accumulate buying when stock price is below $10. Strong fundamental support is found at $9.5; which is about 50-day moving average. The target price for medium term is $11. Cut- loss will be $9.0

References

www.hkex.com.hk

www.etnet.com.hk

www.afe-solutions.com

I, Gary Tam, am a licensed person under the Securities and Futures Commission. Until the date this commentary was published, neither I and/or my affiliates are the beneficiary of the securities mentioned herein or are entitled to any financial interests in relation thereto.