Introduction

In a comprehensive analysis by UOB Kay Hian, CSPC Pharmaceutical Group’s financial performance and future outlook have been scrutinized. As a notable player in the pharmaceutical industry in China, CSPC’s strategic shift from bulk medicine manufacturing to innovative drug production in 2012 has paved the way for its current market position. This report delves into the company’s performance, financial health, strategic initiatives, and future prospects, providing a detailed understanding of its trajectory.

Company Overview

CSPC Pharmaceutical Group has strategically evolved into a leading pharmaceutical entity in China, focusing on innovative drug manufacturing. This transition has been pivotal in redefining its market presence and financial structure. Despite recent challenges, CSPC remains a significant player under the Health Care sector, with its Hong Kong stock market presence indicated by the Bloomberg ticker 1093 HK.

The company’s market capitalization stands at HK\$59,999.9 million, equivalent to US\$7,706.9 million, with a 52-week trading range between HK\$7.83 and HK\$4.45. The major shareholder, Cai Dongchen, holds a 23.9% stake in the company.

Recent Financial Performance

CSPC Pharmaceutical Group reported disappointing financial results for the first nine months of 2024. The company witnessed a 4.9% year-over-year decline in revenue, amounting to Rmb22.7 billion, while adjusted net earnings fell by 15.2% to Rmb4.0 billion. This performance fell short of the previously guided double-digit growth forecast and the estimates for 2024.

Segmental Performance

In the third quarter of 2024, CSPC’s total revenue saw a significant drop of 17.8% year-over-year. Finished drugs, a primary revenue source, experienced a 20% decline. The revenue from Vitamin C remained relatively stable with a 1.0% increase, whereas antibiotics and functional food segments recorded declines of 9.0% and 13.8% respectively. Despite these challenges, the central nervous system products achieved a 4.5% growth, while oncology products declined by 17.6%.

Margins and Expenses

The gross margin remained flat at 70.5%, reflecting CSPC’s efforts in optimizing sales efficiency, leading to a 5.8% decrease in selling expenses. However, administrative expenses rose by 2.9%, and R&D expenses increased by 5.5%, accounting for 20.8% of finished drugs’ revenue. Operating margin and adjusted net margin decreased to 21.4% and 17.6% respectively.

Future Outlook and Strategic Initiatives

Looking ahead, CSPC’s management is optimistic about returning to positive revenue growth in 2025. Despite anticipated challenges in the fourth quarter of 2024, including ongoing impacts from hospital cost control measures and VBP price pressures, CSPC expects newly-launched products to contribute significantly to its revenue in 2025.

The company is enhancing its R&D capabilities, aiming for 1-2 out-licence deals per year. Notably, CSPC has recently collaborated with AstraZeneca, securing an upfront payment of US\$100 million, with potential milestone payments totaling up to US\$1.55 million. This strategic partnership underscores CSPC’s commitment to global business expansion.

Share Buy-Back Program

CSPC has initiated a HK\$5 billion share buy-back plan, having repurchased 227 million shares worth HK\$1.16 billion in recent months. This move demonstrates management’s confidence in CSPC’s business prospects and aims to enhance shareholder returns while stabilizing its stock price.

Recommendation and Risks

UOB Kay Hian maintains a HOLD recommendation for CSPC Pharmaceutical Group, with a revised target price of HK\$5.50. This valuation considers a HK\$2.30/share for existing drugs based on 4x 2025F PE and a NAV-derived pipeline value of HK\$3.20/share.

However, potential risks include policy changes, such as adverse impacts from VBP tenders, patent expirations, intensifying market competition, and uncertainties in R&D and new product launches.