3SBio’s Earnings Modestly Better Than Expected

Narrow-moat 3SBio’s 01530 full-year earnings were modestly better than our assumptions, with revenue and profit margins both outperforming. Our fair value estimate remains at HKD 7.50 per share, and we now view the stock as fairly valued.

Revenue for the six months was CNY 3.8 billion, or 15% year-on-year growth. Although Yisaipu’s (etanercept) six-month revenue declined 23% year on year due to fierce competition in the TNF-alpha market, it was 18% higher than the first half of the year, which suggests sales might be more stable in 2023. Flagship drug TPIAO grew 17% year on year. Hair loss drug Mandi (minoxidil) and contract development and manufacturing organization revenue continued their strong ramp-up trajectories, growing 53% and 56%, respectively. Operating profit margins remained stable, which outperformed our expectation of declining profitability after Yisaipu’s price was cut.

The company has done an admirable job of weathering numerous difficulties last year, which included coronavirus lockdowns and steep declines in Yisaipu’s pricing and market share. Mandi sales and CDMO revenue are bright spots for the company, and are welcome successes after 3SBio’s previous failure to gain significant market share in the insulin market.

However, we remain cautious on the company’s midterm outlook. TPIAO now contributes about half of the company’s total revenue, which raises concerns of future price cuts or competition. Moreover, the company’s pipeline development remains slow. Given our pessimistic outlook on growth and our negative moat trend rating, we think there are more attractive companies in the Chinese drugmaking sector.